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
purchase a life annuity. This annuity will pay you 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, you must
be able to secure life insurance. If you cannot obtain life
insurance, then this strategy will not work.
To illustrate this, we'll go through an example.
Ethel
is 74 years young and in great health and enjoys her retirement to the fullest.
She has seen some of her
retirement income eroded by low interest and low investment returns
over the last few years. Her 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. Her fixed income investments total about
$400,000. Ethel's marginal tax rate is approximately 43.41%
and her current return on her fixed income instruments is averaging
3.25%. Ethel would like to keep $150,000 somewhat
liquid for emergency purposes but would like to explore
opportunities with the other $250,000 of her fixed income
portfolio.
Ethel's financial planner, John, explained the Insured Annuity
strategy to Ethel and after much discussion, decided to proceed with
it.
The following insured annuity
structure will include a Term-100 based Universal Life which will be
funded with one lump sum deposit of $118,000 and no more funds are
required. The remainder of the capital, $132,000 will be used
to purchase a life annuity. This still provides Ethel with
liquidity from the Universal Life policy.
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 |
Single
Insured Annuity |
|
|
Gross Annual Income |
$8,125.00 |
$12,986.76 |
|
|
Taxable Portion |
$8,125.00 |
$2,341.60 |
|
|
Tax Payable |
- $3,527.06 |
- $1,016.49 |
85.10% less
tax payable - after OAS Recouped |
|
Sub-total: |
$4,597.94 |
$11,970.27 |
|
|
Life Insurance Premium: |
$ - |
$ - |
|
|
Recouped OAS Clawback - After Tax |
$ - |
$490.92 |
|
|
After Tax Return: |
$4,597.94 |
$12,461.20 |
171.02% more
after tax income |
|
Capital to Heirs in Estate: |
$250,000.00 |
$250,000.00 |
100%
Capital Preservation |
|
Annual
Income Advantage over GIC: |
$7,863.26 |
|
|
Rate of
Return Required to equal the Insured Annuity: |
8.81% |
|
|
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. |
