How the Insured Annuity Works

Your situation

Your investment portfolio includes interest-bearing investments such as GICs, term deposits, bonds and bank accounts. You’re using the interest earned by the investments to supplement your income. You want to maximize the income you’re receiving today, while preserving your investment capital to make a gift when you die.

An alternative - Insured Annuity

This financial planning strategy requires you to liquidate these investments. The resulting cash is used to purchase a life annuity contract. Once you’ve purchased the annuity, you have eliminated your access to this cash during your lifetime. By using the funds to buy an annuity and combining it with a life insurance policy, this strategy is designed to give you increased income today, while ensuring funds are available to make a gift when you die.

How does the Insured Annuity work?

You purchase a prescribed life annuity contract and an exempt life insurance policy, with you as the life insured. The payments from the annuity are used to pay the life insurance premium and the tax on the annuity. The remaining amount is used to supplement your income. The beneficiary of the life insurance policy is someone
you have named, such as your spouse, child, or favourite charity. When you die, your beneficiary receives the insurance proceeds tax-free.

Insured Annuity … A Client Profile

Who is it for?
• individual, Canadian-resident taxpayers
• affluent, with capital that exceeds lifestyle requirements
• age 65 and older
• in good health
• portfolio includes conservative, liquid investments, such as GICs, bonds and bank
accounts
• interest income is currently used to enhance lifestyle
• leaving a legacy at death is a high priority
• receptive to long-term planning strategies

Why does it work?
• The prescribed annuity yields a higher return than traditional fixed-rate investments.
• The taxable portion of the annuity payments your client receives is less than the interest he or she was earning on the investments. This reduces the amount of tax paid annually.
• The annuity payment includes a combination of interest and principal, while the fixed-rate investment returns interest only.
• The insurance proceeds replace the funds used to purchase the annuity.

An example ...

Your client is a female, 70, non-smoker. She owns $500,000 in GICs that are earning 5% and her marginal tax rate is 45%. The interest from the GICs provides her with $13,750 after tax. The Insured Annuity can increase her annual net income by 47%.

Note: For the GIC to provide the same cash flow as the annuity, it would have to provide a before-tax yield of approximately 7.37%.