BMO Sneaking into the Annuity Business: Guaranteed Payments for Life.

Competitors in the banking and insurance industries are crying foul as the Bank of Montreal is releasing a new product promising mutual fund customers over the age of 55 the opportunity to deposit a lump-sum and receive 6 percent annual payments for life after 10 years. 


The Globe and Mail described the product today as follows:


"In the case of a BMO (TSE: BMO) product, a customer makes a deposit that is invested in the bank’s line of mutual funds and after 10 years receives guaranteed cash payments equal to 6 per cent a year, paid monthly. Those payments continue for 15 years. After that, the customer continues to receive 6-per-cent interest income (based on the original deposit) on an annual basis for the rest of her life or as long as they hold the product."


Of course, the product sounds quite simple, reasonable, and popular... so what is the problem? While, in Canada, banks are prohibited from selling insurance products in their branches, and BMO's competitors are declaring that this product is basically an annuity sold under the guise of a savings product. On the surface, I would have to agree with them. An annuity is essentially a regular income until death or for a fixed period of time purchased from a life insurance company for a lump sum. And that is eactly what the BMO is providing.


Other banks sell insurance products, but they have to do this outside the confines of their branches. Most have skirted around this requirement by simply building insurance businesses attached to their branches, but BMO has not done this yet. If their competitors get their way, perhaps they will have to. Either way, however, for the intelligent investor, BMO's new product sounds like an interesting and fairly sound choice.