What is an Insured Annuity?
Many retirees and seniors prefer to invest in low-risk options like Guaranteed Investment Certificates (GICs) and fixed-income investments. The appeal lies in their stability, but the downside is that these investments often generate low interest rates—especially after taxes. Additionally, with potential interest rate cuts in the future, returns on GICs could decline further.
An alternative strategy to enhance after-tax income while maintaining financial security is an insured annuity. This financial strategy involves shifting funds from low-yield investments, like GICs, into an annuity. The annuity then provides guaranteed income for life. Since a portion of each payment is considered a return of capital, the taxable amount is lower than interest from GICs, resulting in higher after-tax income.
One key consideration is that capital used to purchase the annuity is generally not available to heirs. However, this can be addressed by using a portion of the increased cash flow to buy a life insurance policy that replaces some or all of the initial investment.
How Does an Insured Annuity Work?
Let’s break it down step by step:
- Shifting Capital from GICs to an Annuity: Instead of keeping money in GICs with a modest interest rate, retirees can use the funds to purchase an annuity that guarantees lifetime payments.
- Tax Efficiency of Annuity Payments: An annuity provides a combination of interest income and a tax-free return of capital. This means that compared to fully taxable GIC interest, an annuity’s after-tax income is often significantly higher.
- Using Additional Cash Flow for Life Insurance: To preserve the estate for heirs, some of the extra income from the annuity can be allocated toward a life insurance policy. This ensures that beneficiaries receive a lump sum payout upon the policyholder’s passing, offsetting the annuity purchase.
Example of an Insured Annuity in Action
Imagine a retiree who has traditionally invested in GICs. Their investments generate a fixed return, but taxes significantly reduce their take-home income. By shifting those funds into an annuity, they could more than double their after-tax income, allowing for a more comfortable retirement while also securing a legacy for their heirs through life insurance.
Key Benefits of an Insured Annuity:
- Higher After-Tax Income: Since annuity payments are partially tax-free, they provide more spendable income compared to fully taxable GIC interest.
- Guaranteed Lifetime Payments: An annuity ensures a steady and predictable income for life, reducing concerns about outliving savings.
- Estate Planning Advantage: By using part of the increased cash flow to fund a life insurance policy, retirees can ensure their heirs receive a financial benefit.
- Lower Tax Burden: Annuities are structured to minimize taxable income, making them an attractive option for tax-conscious retirees.
Considerations Before Choosing an Insured Annuity
While an insured annuity can be a powerful financial strategy, it’s important to consider the following:
- Use Non-Registered Investments: This strategy works best with non-registered funds, as RRSPs and RRIFs are fully taxable upon withdrawal.
- Annuity Guarantee Periods: Some annuities include guarantee periods to ensure that payments continue for a minimum number of years, even if the policyholder passes away early.
- Life Insurance Costs: The cost of the insurance policy varies based on age, health, and coverage amount. A financial professional can help determine the best coverage option.
Is an Insured Annuity Right for You?
For retirees looking to maximize after-tax income, reduce tax liabilities, and ensure a legacy for their heirs, an insured annuity can be a strategic solution. It provides stable, tax-efficient income while maintaining estate protection through life insurance.
Next Steps:
- Book an appointment today with a financial advisor to assess if an insured annuity aligns with your retirement goals and long-term financial plan.
- Purchase The Art of Retirement to explore comprehensive retirement strategies, including how insured annuities can play a role in your retirement income planning.
- Compare different annuity and insurance options to find the best fit.
- Consider the long-term impact on your estate and overall financial security.
By understanding and implementing an insured annuity strategy, retirees can enjoy a more secure and prosperous retirement while ensuring their loved ones are financially protected.
