An Insured Annuity Strategy
An insured annuity consists of two elements:
- lump sum funds used to purchase a non-registered life annuity (usually without guarantee period); and
- a low cost life insurance policy (typically T100) with an insurance amount = annuity purchase price.
An insured annuity may be purchased by an individual or corporation.
How They Work
A prescribed life annuity with a zero guarantee period is purchased with non-registered funds:
– At death of annuitant, annuity payments cease
– This type of annuity provides the largest income
Income from a prescribed annuity is a blend of interest and principle; therefore, only a portion of each payment is taxed. The taxable component remains the same in each payment. After-tax income is guaranteed for the life of the client.
A portion of each payment is used to fund the cost of the life insurance:
– Tax-free insurance proceeds replaces the original deposit to the annuity
The remaining funds produce income, typically higher than a GIC.
Advantages
- Annuity produces higher income than a GIC
- Tax preferred treatment of prescribed annuity produces less income tax
- Annuity income is paid for life and is guaranteed
- Proceeds from the life insurance are paid tax free and, if properly structured, will pass outside the will and avoid probate and related costs
Comparison
A 70 year old female buys a life annuity with no guarantee for $500,000. She also purchases a Term to 100 contract for $500,000.
| GIC@4.25% |
Insured Annuity |
|||
| $1771 | Gross Income | $3600 | ||
| $691 | Taxable Portion | $1000 | ||
| $1771 | Tax @ 39% | $390 | ||
| $1080 | After tax income | $3210 | ||
| N/A | Life Insurance Cost | $1289 | ||
| $1080 | Net Income | $1921 | ||
- The insured annuity provides more net spendable income and still maintains the full estate value of $500,000.
- The equivalent pre-tax rate of return, assuming a 39% tax rate is 7.56%
(All the above information is subject to errors and omissions.)
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