Does someone have their hand in your pocket?
Insured - Back-to-Back Annuity
Many people interested in securing their capital dollars and at the same time receiving an income for their personal use invest in so-called secure investments i.e. GICs, Bonds, daily interest accounts etc. While these investments ensure safety of principal, their after-tax returns are generally quite low.
Insured - Back-to-Back Annuity
Many people interested in securing their capital dollars and at the same time receiving an income for their personal use invest in so-called secure investments i.e. GICs, Bonds, daily interest accounts etc. While these investments ensure safety of principal, their after-tax returns are generally quite low.
There is one often-overlooked alternative that will allow you to increase your after-tax return without eating away the capital available to your estate. This investment is called an “Insured Annuity” or “Back-to-Back” strategy. An Insured Annuity simply involves buying a prescribed annuity plus life insurance.Here’s how it works.
Let’s look at two different approaches:
Approach #1:
A 70-year-old female has $300,000 invested in a G.I.C. paying 3% interest (guaranteed for 5 years), which provides her with $9,000 of income annually.
She has other income sources and her marginal tax rate is 30%.
She will pay tax of $2,700 annually on her GIC income, and will be left with $6,300 each year as personal use income.
She would like to leave the $300,000 to her children, so she likes the GIC because she can use the interest without ever touching the $300,000 capital.
It’s true that her investment in a GIC will successfully preserve her $300,000 capital, but the interest income is totally taxed and so she’s left with very little each year.
Approach #2:
We have a 70 year-old female who has $300,000 that is invested in a GIC, providing the same $6,300 after-taxes. Our female investor decides to use the “Canada Insured Annuity” strategy.
She buys a canadian prescribed life annuity with the $300,000 she had sitting in the GIC.
The annuity will pay her $25,936 a year. Since only a portion of this amount is taxable (i.e., $6,736), the tax on that amount @ 30% will be just $2,021 each year.
With annuities, each annuity payment is made up of interest income plus a return of capital tax-free.The interest portion attracts some tax - but much less than she was paying with the GIC. After taxes she is left with $23,915 ($25,936 minus $2,021), which is much higher than the $8,400 she received annually with the GIC.
Here’s the drawback:
Each time she receives an annuity payment, she’s getting back some of her original $300,000 capital, so that she won’t be able to leave her children the $300,000 that she could have with the GIC. In fact, aside from buying an annuity with a guaranteed payment period, there’s no way to leave any of that $300,000 to her kids, since the canadian insurance company will keep whatever is left of her capital on her death.
That’s what people don’t like about annuities.
But here is her solution:
With the extra cash she’s receiving, she can buy a life insurance policy that will pay her children $300,000 (tax free) when she dies.
The cost of the canadian life insurance policy is $9,720 each year.She takes the $23,915 she has been receiving after taxes, pays her annual insurance premium of $9,720, and is left with $14,195 in her pocket.
This $14,195 is a full $7,895 more than the $6,300 of after-tax income she used to receive on her GIC! (See chart below.)The Insured Annuity works best with those aged 65-85, either on a single or joint life basis. Older ages for an Insured Annuity produce dramatic returns. But, as with all life insurance related programs, you must pass a health review in order to qualify.Insured Annuities also work well in corporate situations where money is held in an active or inactive holding/investment company.
This strategy could potentially help someone withdraw money out of their corporation tax free and remove the capital gains taxes payable on death.By investing just a portion of your capital in an Insured Annuity, you will have significantly improved your financial health by reducing taxes and producing a higher, guaranteed cash flow.
A 70-year-old female has $300,000 invested in a G.I.C. paying 3% interest (guaranteed for 5 years), which provides her with $9,000 of income annually.
She has other income sources and her marginal tax rate is 30%.
She will pay tax of $2,700 annually on her GIC income, and will be left with $6,300 each year as personal use income.
She would like to leave the $300,000 to her children, so she likes the GIC because she can use the interest without ever touching the $300,000 capital.
It’s true that her investment in a GIC will successfully preserve her $300,000 capital, but the interest income is totally taxed and so she’s left with very little each year.
Approach #2:
We have a 70 year-old female who has $300,000 that is invested in a GIC, providing the same $6,300 after-taxes. Our female investor decides to use the “Canada Insured Annuity” strategy.
She buys a canadian prescribed life annuity with the $300,000 she had sitting in the GIC.
The annuity will pay her $25,936 a year. Since only a portion of this amount is taxable (i.e., $6,736), the tax on that amount @ 30% will be just $2,021 each year.
With annuities, each annuity payment is made up of interest income plus a return of capital tax-free.The interest portion attracts some tax - but much less than she was paying with the GIC. After taxes she is left with $23,915 ($25,936 minus $2,021), which is much higher than the $8,400 she received annually with the GIC.
Here’s the drawback:
Each time she receives an annuity payment, she’s getting back some of her original $300,000 capital, so that she won’t be able to leave her children the $300,000 that she could have with the GIC. In fact, aside from buying an annuity with a guaranteed payment period, there’s no way to leave any of that $300,000 to her kids, since the canadian insurance company will keep whatever is left of her capital on her death.
That’s what people don’t like about annuities.
But here is her solution:
With the extra cash she’s receiving, she can buy a life insurance policy that will pay her children $300,000 (tax free) when she dies.
The cost of the canadian life insurance policy is $9,720 each year.She takes the $23,915 she has been receiving after taxes, pays her annual insurance premium of $9,720, and is left with $14,195 in her pocket.
This $14,195 is a full $7,895 more than the $6,300 of after-tax income she used to receive on her GIC! (See chart below.)The Insured Annuity works best with those aged 65-85, either on a single or joint life basis. Older ages for an Insured Annuity produce dramatic returns. But, as with all life insurance related programs, you must pass a health review in order to qualify.Insured Annuities also work well in corporate situations where money is held in an active or inactive holding/investment company.
This strategy could potentially help someone withdraw money out of their corporation tax free and remove the capital gains taxes payable on death.By investing just a portion of your capital in an Insured Annuity, you will have significantly improved your financial health by reducing taxes and producing a higher, guaranteed cash flow.
12 comments:
Awesome article! I have gradually become fan of your article and would like to suggest putting some new updates to make it more effective.
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From your blog I came to know the draw backs in this type of insurance, actually I will refer about the Insurance details here but I got this also as a source.
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I'm so grateful that you provided insights on insured annuity in Canada. My sister's friend asked me and my husband about the advantages of having insured annuity, especially when the insured dies. She is also researching on various term life insurance policy rates in order to decide for her insurance needs. It's good that you presented the drawback too.
Your article made so much sense, I'm a younger woman in my late twenties looking at what my options are for my future & this helped put a lot of things in perspective!
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Thanks for very well explaining the benefits of investing in annuity plans. Many of my friends have already tested this investment option because of which I also wanted to try it.
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Very nice post, thanks for sharing the information. Keep up the good work.
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