In these times of low interest rates, retirees are looking for higher yields on their money without taking a lot of risk. Moving your money out of a GIC Investment into an Insured Annuity is one of the best ways to possibly double your income and avoid probate without increasing risk.
The investment itself is actually two transactions, the purchase of a life annuity and the purchase of a permanent life insurance policy. There are two necessary requirements:
1) you must be insurable
2) you must have non-registered monies which will not be required before death
In fact, the best way to view this investment is a GIC for life. Many insured annuities are completed for retirees every year. Often they are done on a joint-last-to-die basis. But they can also be done on a single life. Depending upon age and gender, a single life may provide a higher yield than a joint life.
The first step is to apply for a life insurance policy equal to the amount you will place into the life annuity. Once your life insurance policy is issued and you have received the contract and paid one month’s premium, you then purchase a life annuity, which will make monthly payments to you for life. Usually the Life Insurance Company that issues the life policy is not the same Life Insurance Company that guarantees the annuity payments. Every month the annuity payment will be deposited by wire transfer into your bank account. Every month the life insurance premium will be withdrawn by wire transfer from your account. The net deposit left in your account is your monthly income.
At the end of each tax year, the Life Insurance Company making the annuity payments will send a T4A to the owner of the annuity. Here is where the insured annuity provides a huge benefit. The older you are when the annuity is purchased, the smaller the portion of the annuity that is taxable. As a rough guide, at about age 82, none of the annuity payments are considered taxable by Canada Revenue Agency (CRA).
Below is an example for an 81 year old female. She was rated “standard” health, non-smoker by the insurance company. Note that she was in a 40% marginal tax bracket. Keep in mind that the life insurance policy she purchased was for the same amount that she placed into the annuity, $500,000. On her death, her husband is paid $500,000, without any taxes or fees. However, since her husband was uninsurable, he is likely to die first. If her husband is no longer alive on her death, the children and charities will divide the $500,000 as designated in the life insurance policy, again without taxes or fees.
| 1. | Annuity Purchased (Investment) | $500,000.00 |
| 2. | Annuity Monthly Income | $ 4,934.92 |
| 3. | Taxable Portion | $ 136.84 |
| 4. | Tax at 40% | $ 54.73 |
| 5. | Net Annuity Amount (line 2 – line 4) | $ 4,880.19 |
| 6. | Insurance premium | $ 2,976.70 |
| 7. | After-Tax Monthly Income (line 5 – line 6) | $ 1,903.49 |
| 8 | After-Tax Annual Income (line 7×12 months | $ 22,841.88 |
| 9. | After-Tax Yield | 4.57% |
| 10. | Pre-Tax Yield (40% tax bracket) | 7.62% |
This is an excellent Estate Planning tool to avoid probate, thereby reducing estate costs (legal, accounting, executor and probate). The Insured Annuity is a topic bankers and corporate executors do not like to discuss.
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