When people think of retirement, they often ask themselves if they will have enough. The fear of outliving their money is real and, in many cases, sends clients to the investment sidelines when markets dip.
Traditionally, investments such as T-Bills, GICs and bonds have been used to preserve capital and generate income to fund their lifestyles in retirement. However, the after-tax return on these vehicles in this environment is barely enough to break even.
Consider an insured annuity to guarantee a higher income for life, minimize taxes payable throughout and flow the original capital to beneficiaries upon death.
This strategy involves two separate contracts: a non-registered prescribed life annuity and a permanent life insurance policy.
The prescribed life annuity, even in low rate environments, typically pays a higher income than traditional fixed income investments and guarantees it for as long as you live. Each payment is a blend of capital and interest where only the interest portion is taxable.
The permanent insurance is typically a minimum funded universal life or a term to 100 policy.
Example…Male, 65/Female, 65
Joint Last to Die Annuity/Term to 100 Insurance Policy
Principal / Face Amount: $500,000
GIC Rate: 2.5%
Tax Rate: 50.40%
| GIC | Insured Annuity | |
| Monthly Cash Flow | $1,042 | $2,008 |
| Tax Payable | $525 | $209 |
| Insurance Premium | $0 | $802 |
| Net Monthly Cash Flow | $517 | $997 |
| Net After Tax Yield | 1.24% | 2.39% |
| Equivalent GIC Rate | 4.83% |
This strategy can be used for individual, joint and corporate situations. In some cases, a front to back strategy can be employed whereby the insurance is purchased several years before the annuity to guarantee lower lifetime premiums. Once ready to begin receiving income, the client can then purchase the annuity with no worry about insurability.
If you have any questions or would like to learn more, please call Matthias at 778-400-2816.
