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Are you looking for a way to provide for your family and protect your assets?
An insured annuity is the perfect solution. It provides guaranteed income, while also providing protection against inflation and market fluctuations. In the end, your assets pass on to your loved ones in an efficient way.
With an insured annuity, you can rest assured that no matter what happens in the future, your loved ones will be taken care of.
Read on to learn more about how an insured annuity works.
What Is The Insured Annuity Strategy?
Insured annuities are essentially life annuities and permanent insurance policies, with some added perks. You’ll get guaranteed income when you need it most and the opportunity to keep your savings intact when you die.
Compared to most traditional alternatives, an insured annuity provides distinct advantages such as:
- Increased security through a guaranteed lifetime income
- Higher after-tax income
- Protection against inflation and market losses
- Capital preservation
- Transferring your assets outside of your estate, bypassing the costly probate and executor fees
How does it work?
An insured annuity is a combination of a life annuity and permanent life insurance. Here’s a brief description of each:
Life annuity: You give the insurance company a lump sum payment. In exchange, it pays you a monthly income during your lifetime as long as you are alive.
Permanent life insurance: You pay the insurance company a regular stream of payments. In exchange, it pays your loved ones a death benefit when you die.
The death benefit replaces the lump sum amount you paid to the insurance company for the annuity.
The net result of the insured annuity strategy is that you increase your net income compared to other fixed-income investments, while still leaving an estate for your loved ones.
Who is it for?
If you are retired or are approaching retirement, you should consider the insured annuity concept. It not only guarantees a higher income to supplement other sources but also allows you to preserve your savings for the future and provide it as inheritance for loved ones.
However, an insured annuity should not make up your entire retirement plan. Instead, you should consider it as part of a larger diversified plan that includes other types of investments.
In general, here are some of the profiles that the strategy fits:
- You are looking for a conservative investment strategy requiring little or no management.
- You want to leave a legacy for your loved ones.
- You are not afraid of locking your funds with no access to them.
- You have non-registered funds available that would otherwise be taxed at a high rate and claw back your Old Age Security benefits.
- Your health is average or better to qualify for standard rates for the insurance.
- You are open to long-term planning strategies.
How is an insured annuity taxed?
If you are buying an annuity with non-registered funds (not RRSP or TFSA), there are two types: prescribed and non-prescribed.
When you receive payments from a prescribed annuity, only a small portion of it is taxable. The rest is considered a return of capital. Over time, the taxable portion stays level.
Conversely, the taxable income from a non-prescribed annuity starts out high and decreases over time. Overall, a prescribed annuity is more tax-advantageous than a non-prescribed annuity.
Case Study (How An Insured Annuity Can Increase Your Retirement Income By 150%)
Let’s take a look at John, a 65-year-old non-smoker who recently retired. John worked hard to build up his savings and as a result, he has $500,000 of non-registered investments.
As he’s now retired, he’s looking for a more conservative investment for his portfolio. He wants to live off the income from his investment and leave the capital for his loved ones. He’s currently eying a GIC yielding 1.5%. His marginal tax rate is 28.2%.
What would it look like if he bought an insured annuity instead? With an insured annuity, John first buys a permanent insurance policy for $15,515/year with a $500,000 death benefit. Next, he buys a life annuity with $500,000 which pays him $30,658/year.
Let’s take a look and compare the difference.
| GIC | Insured Annuity | |
|---|---|---|
| Annual income | $7,500 | $30,658 |
| Return of capital | N/A | $24,630 |
| Interest | $7,500 | $6,028 |
| Less: tax payable | -$2,115 | -$1,700 |
| Net income before insurance premiums | $5,385 | $28,958 |
| Less: insurance premiums | N/A | -$15,515 |
| Net income | $5,385 | $13,443 |
As you can see, the insured annuity strategy provides $8,058 more after-tax income than using a GIC. That’s an increase of 150%!
Not only that, but the death benefit bypasses his estate and goes directly to his loved ones. Thus, he avoids paying probate and executor fees.
Other Ways To Structure An Insured Annuity
Besides the single life insured annuity mentioned above, there are a few other ways to structure the insured annuity.
Indexed annuity
This type of annuity starts off with lower payments but increases every year. It might take a long time for payments to match and exceed the regular type of annuity. But it’s an effective way to offset the effects of inflation.
Single deposit insured annuity
Instead of paying for the permanent insurance policy every year, you pay a large lump sum amount at once. You’ll have less money to buy the annuity which results in lower payments from the annuity. But since you don’t have to pay any insurance premiums after the first year, it improves your cash flow.
Charitable giving using an insured annuity
Instead of naming your heirs as the beneficiary of the insurance policy, you name your favourite charity. You benefit from the guaranteed lifetime income while you’re alive, and you reduce your taxes with a tax credit when you die.
Joint insured annuity
Besides buying an annuity on a single life, you can also buy it on two lives. With a joint annuity, the payments end when the second person passes away. Of course, the income you receive will be lower since the insurance company expects to pay it for a longer time.
At the same time, you buy a joint last-to-die life insurance policy that covers two lives. This is a cheaper type of insurance that pays out when the second person dies.
Corporate insured annuity
Are most of your investments held inside your corporation? Don’t fret, you can use the corporation to execute the insured annuity strategy.
A few things you should keep in mind for a corporation:
- The only type of annuity you can buy is non-prescribed, so it will be taxed differently.
- Although you have to name your corporation as the beneficiary of the life insurance, you can still get most if not all the money to your loved ones tax-free. That’s because the death benefit gives a credit to your corporation’s capital dividend account that you can use to pay out a tax-free dividend to your estate.
Is An Insured Annuity For You?
Do you want a guaranteed tax-advantaged income stream for life? How about the preservation of your capital?
If so, the insured annuity concept could be right for you. It allows you to enjoy both of these benefits without sacrificing one for the other.
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And how about today with a GIC at 5%?
And also….what would it look like for a 75 year old male ….me? I guess the unknown is the life insurance cost?
Thank you.
Hi John, the GIC looks more attractive now with higher rates than the insured annuity strategy. That’s because while rates have increased, the annuity income hasn’t gone up as much as GICs, and the life insurance premiums remain elevated. Therefore, the pendulum has swung back in favour of using GICs.