Insured Annuity Canada
An Insured Annuity Can Increase Cash Flow AND Protect Your Capital
How do you feel about the possibility of increasing your retirement income and reducing the amount of tax that you pay? Consider an Insured Annuity as an alternative to fixed interest rate investments like GICs.
If you are retired or approaching retirement in Canada, you may be depending upon non-registered investments to supplement your income from other sources. As you know, the income from non-registered investments is fully taxable on an annual basis. Also, on death such assets may be subject to probate and income tax in Canada as part of your estate.
As a risk-adverse investor, how could you provide a better potential return for yourself without exposing your investments to further market volatility? The insured annuity could be the answer for you that can provide greater income with increased tax reduction.
How does an Insured Annuity work?
The insured annuity begins with the purchase of a prescribed life annuity using non-registered funds (preferrable the least tax effecient investments generating interest income, like GICs). Then a payout annuity provides a level, guaranteed income for the remainder of your life. Income is calculated by averaging the interest that would be earned over the rest of your life, combined with a level amount of capital both of which are returned to you each year. Tax is payable only on the part of the income that is interest – the net cash flow provided by the annuity is greater than other guaranteed interest investments. Upon death, the annuity payments end.
What about my estate/heirs if I die soon after getting my annuity?
The other component of an insured annuity is a life insurance policy. The death benefit is equal to the initial annuity deposit. The insurance premiums are paid from the tax savings and increased cash flow provided by the annuity. The proceeds are paid out on death directly to your named beneficiaries, tax-free and exempt from probate, legal and executor fees.
GIC VS INSURED ANNUITY
Male age 75, non-smoker, $500,000 investment (non-registered)
|5%||Annual Investment Rate||N/A|
|$25,000||Gross Annual Income||$55,570|
|($9,750)||Tax Payable (at a 39% marginal tax rate)||($1,486)|
|$15,250||After Tax Income||$54,084|
|N/A||Annual Insurance Premium||$26,605|
|$15,250||Net Annual Income||$27,479|
|N/A||Equivalent Annual Pre-Tax Yield||9.01%|
|N/A||Difference in annual income||$12,229|
|Increase over GIC Yield||80.19%|
* This Insured Annuity scenario is based on current Life Payout Annuity rates and Term 100 rates from Empire Life and BMO Insurance respectively as of May 31, 2010.