How to enjoy guaranteed income for life and leave a legacy
Today’s low interest rates and volatile markets can present a challenge for investors who need income from their portfolios. Conservative investments such as Guaranteed Investment Certificates (GICs) may not produce the amount of income you need, yet you may not be comfortable with the volatility associated with an increased equity allocation.
An alternative you may want to explore is the Insured Annuity strategy.
This strategy will assure you income for life, with no chance that your money can run out before you have planned, while providing a taxeffective legacy for your heirs.
If you are between the ages of 60 and 85, in good health, have a low risk tolerance and want to leave an estate, the Insured Annuity strategy may be an effective solution for you.
How the strategy works
The Insured Annuity strategy uses two products to produce its benefits: a Life Annuity, which provides guaranteed income for your life and for the life of your spouse, if you choose; and a permanent life insurance policy with a death benefit equal to the amount originally invested in the annuity.
The annuity component. The annuity pays a regular stream of income, part of which is a return of capital and therefore not subject to taxation. (Note that the annuity must be purchased with nonregistered assets in order for the tax benefits to apply.) You can use a portion of each payment to cover the premiums on the life insurance policy.
The life insurance policy. On your death (or the death of your spouse, with a joint-and-last-to-die insurance policy), the death benefit is paid directly to the named beneficiaries. The money is tax free and does not pass through your estate, avoiding probate fees and possible complications and delays.
The example below illustrates how the Insured Annuity strategy can provide a 65-year-old couple an equivalent pre-tax return of approximately 7.47%.
GIC versus Insured Annuity
The example below shows how a 65-year-old couple with $500,000 in non-registered assets can use the Insured Annuity strategy to increase their cash flow while preserving their estate for their children and grandchildren.
GIC at 4.5% Monthly income Insured Annuity strategy $500,000 Total investment $500,000 $1,875 Gross income $2,683 $1,875 Taxable income (interest component) $919 $870 Taxes payable at 46.4% rate $427 N/A Insurance cost (premiums) $589* $1,005 Net income $1,668 * Annuity payments will not cover initial premium requirements. Assumes 65-year-old couple, non-smoking. Rates will vary.
Source: Insurance Policy – Empire Life; Annuity (joint and last to die) – Standard Life, July 2009.
Is the Insured Annuity the right choice for you?
Before choosing this strategy, it’s important to understand all of the considerations. First, an annuity investment is locked in for life and should not represent your entire fixed-income allocation. As well, the return is fixed and will not rise if interest rates increase in future.
If you are concerned about getting sufficient income from your assets and wish to leave a secure legacy for your heirs, the Insured Annuity strategy may be an effective long-term solution. Contact us for more information and an analysis of the potential benefits based on your circumstances.