Y
es — you do lose access to your principal. For many, that is why they don’t invest in insured annuities — because you never know what else you might want to use your money for.
But if you need income, and you know you are always going to need income — why not focus on the advantages of guaranteed income for life rather than the apparent disadvantages?
At times like this it amazes me that more people don’t consider insured annuities. Often there are legitimate reasons why this investment and estate planning strategy may not be appropriate, but at times (perhaps too often) it may be a case of wanting to have your cake and eat it too. And all too often, it is a decision that investors regret later.
What is an Insured Annuity?
In a nutshell, an insured annuity is a combination of a prescribed annuity (an annuity purchased with non-registered assets) and an insurance policy. The annuity provides lifetime income with the added benefit of preferential tax treatment. Since prescribed annuities report level interest for the duration of the annuity, and because annuity income consists (in part) of a non-taxable return of your capital, annuitants receive enhanced after-tax income compared to other fixed-income investments such as GICs.
The income generated from the annuity then pays for the other component of the insured annuity, the life insurance policy. The life insurance guarantees that your beneficiaries receive an amount equal to the original annuity investment. This means that you don’t have to worry about an annuity purchase eroding the size of your estate because your beneficiaries will receive the value of your estate through insurance proceeds.
Benefits of an Insured Annuity
Retirees choose insured annuities for four main reasons: a) they receive a greater after-tax income; b) an annuity may make the retiree eligible for increased government benefits; c) an annuity guarantees a lifetime income; d) an insured annuity leaves the retiree’s estate intact.
The income from insured annuities combines principal and interest payments, allowing annuitants to maximize their retirement income. This income is then spread equally over the life of the annuity, thus reducing taxes.
Because annuitants enjoy reduced taxable income, retirees may also increase their government benefits, such as the Guaranteed Income Supplement, Old Age Security, Age Tax Credits, Property Purchase Tax Credits, etc. Another feature retirees appreciate about insured annuities is that the annuity income can be eligible for the $1,000 pension income tax credit. Talk to your tax professional for details.
Who Benefits from an Insured Annuity?
An insured annuity may not be the answer for everyone. Ideally, this fixed-income investment is suited for individuals or couples who:
• Are not comfortable with risk
• Are dissatisfied with current low interest rates
• Are looking to maximize after-tax income
• Seek to maximize government benefits and lower taxes
• Desire a guaranteed income for life
• Want to leave a tax-free gift to their heirs
• Are seeking peace of mind
If you think the shoe fits, at the very least look into it. Insured annuities can be structured in many ways depending on what is best for you.
For more information on this or other ideas, please feel free to call or email. For PDF versions of this or previous articles please e-mail jim.grant@raymondjames.ca.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member CIPF.Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at (250) 594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.