A Guaranteed Increase in Retirement Income - the
alternative to GICs
Seniors today are getting discouraged and are seeing their
portfolios dwindle with both a low interest rate and low investment
return environment.
For those seniors who
would like to increase their after-tax income and preserve their
capital in their estate, there is a simple and guaranteed strategy
that will do both. This strategy is known as an Insured
Annuity.
This strategy is by no
means a new concept. As this strategy uses a Life Annuity and
Life Insurance, most think that "How can these vehicles increase my
income? Interest rates are low and life insurance at my age is
expensive?"
Using both of these
vehicles play both ends of the mortality scale - an annuity if you
live too long and life insurance if you die too soon.
How this works, is that
first of all, you (or both you and your spouse) purchase a life
annuity. This annuity will pay you (or both you and your
spouse) an income for life. This payment is a blend of both
principal and interest. The interest is "prescribed" meaning
that it will be the same every year for life. As most of the
annuity payment is a return of principal, the payment is
mostly tax-free. At death, the payments will
stop. This is where the life insurance comes into play and
replaces the capital used back to the estate for your heirs.
The end result is that you have increased your after-tax income and
left the same amount in your estate for your heirs as compared to
using traditional GICs.
In order for this strategy to be
advantaged over traditional interest-bearing investments, either one
spouse or both spouses must be able to secure life insurance at a
standard rate. If one spouse is not insurable, the same end
result is achieved by using this strategy on one spouse
(click here to view this
strategy on one person).
If neither spouse can obtain life insurance, then this strategy will
not work.
To illustrate this,
we'll go through an example.
Fred and Ethel are both
72 years young and in great health and enjoy their retirement to the
fullest. They have seen some of their retirement income eroded
by low interest and low investment returns over the last few years.
Their retirement income sources are derived from work pensions, RRIFs, OAS, CPP, a modest equity investment portfolio, and a
sizeable fixed income portfolio made up of GICs and T-Bills.
Their fixed income investments total about $400,000. Their
marginal tax rate is approximately 43.41% and their current return
on their fixed income instruments is averaging 3.25%. Fred and
Ethel would like to keep $150,000 somewhat liquid for emergency
purposes but would like to explore opportunities with the other
$250,000 of their fixed income portfolio.
Their financial planner,
John, explained the Insured Annuity strategy to Fred and Ethel and
after much discussion, decided to proceed with it.
Here is the breakdown
and comparison between the GICs and the Insured Annuity strategy:
|
Current
5-Year GIC Rate: |
3.25% |
|
|
Marginal
Tax Rate: |
43.41% |
|
|
Capital
Invested: |
$250,000.00 |
|
| |
Traditional GIC |
Joint Insured Annuity |
|
|
Gross Annual Income |
$8,125.00 |
$19,650.36 |
|
|
Taxable Portion |
$8,125.00 |
$4,769.41 |
, |
|
Tax Payable |
- $3,527.06, |
- $2,070.40 |
|
|
Sub-total: |
$4,597.94 |
$17,579.96 |
|
|
Life Insurance Premium: |
$ - |
-$5,610.00 |
|
|
Recouped OAS Clawback - After Tax |
$ - |
$284.84 |
49.38%
less tax payable after OAS Recouped |
|
After Tax Return: |
$4,597.94 |
$12,254.80 |
166.53% more
after tax income |
|
Capital to Heirs in Estate: |
$250,000.00 |
$250,000.00 |
100%
Capital Preservation |
|
Annual
Income Advantage over GIC: |
$7,656.86 |
|
|
Rate of Return
Required to equal the Insured Annuity: |
8.66% |
|
|
All quotes as of
January 21, 2010 and are subject to change without notice.
Life insurance rates quoted are
standard rates and are subject to the approval of the
underwriting department of the life insurance company.
E. & O. E. |
