Reaching retirement goals with fixed income is more and more challenging. Why not consider an insured annuity?

April 2014

    

The combination of a life annuity and a life insurance contract may bring much higher yield of return than other fixed income products.

Benefits

  • Guaranteed, tax efficient income for life
  • Guaranteed death benefit and estate preservation.
  • Potential to outperform the after tax rate of return of traditional fixed income investments

Who can benefit from this strategy?

An Insured Annuity can be a strategy to consider for someone over the age of 60, in good health, risk averse, who requires an income from their investments, and wants to leave a guaranteed death benefit to their heirs or favourite charity.

How does it work?

An Insured Annuity works by purchasing a prescribed life annuity contract and a permanent life insurance contract with a death benefit equal to the capital invested in the annuity. Generally, payments received from the annuity are used:

  1. to pay the life insurance premium
  2. to pay the tax on the annuity
  3. to supplement retirement income

At death, the annuity payments typically cease and the life insurance death benefit is paid to the estate or named beneficiary. As both components play an important role, let’s review them individually.
 

CASE STUDY
Insured Annuity

Margaret is a recently widowed 70-year-old female. Her assets include a house that is paid for, a small pension rolled over from her late husband, $250,000 in a Registered Retirement Income Fund and $1.5 Million in a  fixed income portfolio from which she is currently drawing the majority of her retirement income. Her goal is to ensure that she has enough funds to live on and still be able to leave a guaranteed amount to her three children.

One solution to consider is for Margaret to use a portion of her fixed income portfolio to purchase a $500,000 Insured Annuity. In this way, Margaret could guarantee a specified minimum amount for each child on her death and provide herself with additional after-tax guaranteed income while she is alive. 

Fixed income vs Insured Annuity investment

 

Fixed Income

Insured Annuity

Investment

$500,000

$500,000

Annual income*

$20,000

$37,140

Marginal tax rate

45%

45%

Tax due

$9,000

$2,734

Cash flow

$11,000

$34,406

Cost of insurance

$0

$17,676

Net annual cash flow

$11,000

$16,730

Amount of funds
available at death

$500,000

$500,000


* Annuity rates will fluctuate. This income is for illustration purposes only. The guaranteed income amount on the date of purchase may be different. Gross annual income from the fixed income investment is assumed to be 4% per year. 
Note: This scenario uses a non-guaranteed prescribed annuity.

    

As you can see above, the Insured Annuity gives Margaret a better income than fixed income investments in many respects. On death, the initial $500,000 deposited into the annuity contract will be paid out as a death benefit from the life insurance policy, tax free, to Margaret’s beneficiaries.
 
Looking for more information? Contact your advisor for a copy of our Insured Annuities education article.

Previous Tax & Estate Planning Strategies
View items by year:

2013

2012

2011

  • Reaching retirement goals with fixed income is more and more challenging. Why not consider an insured annuity?

    Apr 01, 2014

    The combination of a life annuity and a life insurance contract may bring much higher yield of return than other fixed income products.
    read more
  • Beware of the changes recently announced to tax benefits of testamentary trusts and estates in the Federal Budget 2014

    Mar 05, 2014

    Have you considered using trusts as part of your estate planning? If so, beware of the changes recently announced in Federal Budget 2014 which, if passed, will eliminate some of the tax benefits of testamentary trusts and estates beginning in 2016.
    read more
  • Being an executor – An honour or a burden?

    Feb 06, 2014

    Acting as an executor can be a daunting task that takes time, knowledge and patience. When acting as an executor, you owe a duty of care to all persons interested in the estate, so the role should not be taken lightly.
    read more
  • Start the new year with a spousal loan strategy to reduce taxes

    Jan 02, 2014

    Now may be the opportune time to consider putting a spousal loan to work for you. After increasing the prescribed interest rate from 1% to 2% last September, CRA has now announced that it will decrease the rate back down to 1% for Q1 2014.
    read more
  • 2013 Tax Filing Changes: Foreign Income Verification Statement

    Dec 02, 2013

    In the 2013 Budget, the federal government announced it would take further measures to ensure that Canadian taxpayers with foreign holdings pay their fair share of federal taxes. To further this objective, the Canada Revenue Agency (CRA) revised the T1135 to require more detailed information about taxpayers and partnerships’ foreign holdings...
    read more
  • 2013 Year-end Tax Planning Checklist

    Nov 07, 2013

    Financial planning is time sensitive. While the following list is not exhaustive, here are some items that must be considered, incurred or paid prior to year end in order to be included in your 2013 tax return...
    read more
  • Beware of potential U.S. tax filing requirements

    Oct 04, 2013

    Canadian taxpayers may be at risk of a U.S. income tax liability. The legislation surrounding this issue has changed over the years, so it is important to evaluate your own situation to avoid any unpleasant surprises from the IRS...
    read more
  • Cottage Succession - Keeping it in the family

    Sep 05, 2013

    For most of us, there are wonderful memories attached to a family cottage. However, at some point, cottage owners will face the financial and emotional challenges of selling or transferring this cherished family asset...
    read more
  • Protecting yourself from possible lost income when the unexpected occurs - Understanding and maximizing Disability Insurance Coverage

    Aug 01, 2013

    While no one wants to contemplate the possibility of becoming disabled, the fact remains that if you fail to plan, the result to your lifestyle and the needs of your family can be seriously impacted...
    read more
  • Pension Income Splitting: Save taxes and enhance your family's wealth

    Jul 04, 2013

    Income splitting is a tax planning strategy that shifts income from a higher income earner to a lower income earner in order to reduce the overall tax paid by the family...
    read more
  • Renting your U.S. vacation property - Be sure you know the tax implications

    Jun 04, 2013

    Like many Canadians, you may own a vacation property in the United States (U.S.). And, you may be considering renting it out for the purpose of earning income or to defray the ongoing maintenance expenses. Before you begin renting your U.S. vacation property, however, you should take into account both the U.S. and Canadian income tax consequences...
    read more
  • What’s at the heart of your business?

    May 06, 2013

    You’ve worked hard to grow your business over the years and now it’s time to share the wealth with your favourite charity. Giving back through a personalized charitable giving strategy speaks volumes about who you are and the values you hold dear.
    read more
  • Family Wealth Transfer Plan: Permanent life insurance, an efficient way to accumulate and transfer wealth

    Apr 02, 2013

    Are you aware that permanent life insurance can be used as an efficient way of accumulating and transferring wealth? The Family Wealth Transfer Plan utilizes an effective insurance strategy that allows a parent or grand parent to transfer assets tax free to the next generation...
    read more
  • Trusts – An integral part of your estate plan

    Mar 01, 2013

    Integrating a trust (or multiple trusts) as part of your estate plan may provide significant benefits to you and your family. Typical benefits may include...
    read more
  • RRSP or TFSA contributions – which should I choose?

    Feb 01, 2013

    Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs) are two types of registered savings programs. Canadians are encouraged to contribute to both types of savings vehicles, but how do they really compare?
    read more
  • Take advantage of new limits to maximize contributions to your Tax-Free Savings Account

    Jan 04, 2013

    Effective January 1, 2013, the annual contribution limit for Tax-Free Savings Accounts has increased to $5,500. While this may be a small portion of your overall savings strategy annually, it can be one of the most powerful...
    read more
  • 2012 – 2013 TAX PLANNING STRATEGIES to minimize your taxes, maximize your wealth

    Dec 03, 2012

    As you may know, financial planning is time sensitive and many tax strategies are driven by deadlines. While the following list is not exhaustive, here are some timely action items...
    read more
  • Tax loss selling – Smart strategy to reduce your capital gains this year

    Nov 01, 2012

    Each year, whether in bull or bear markets, volatility presents investors with tax loss selling opportunities. If you’ve realized capital gains in the year, consider selling assets with an accrued loss to offset the gains. You may also realize the loss if you’ve had capital gains...
    read more
  • Choosing a guardian for your children: Take time today to secure their future

    Oct 02, 2012

    Making a decision about who should raise your children in the event that something happens to you is not easy. However, as difficult as it is, taking the time to choose an appropriate guardian (tutor in Quebec) for your children will provide you peace of mind and will ensure someone guides and supports them through young adulthood and into maturity...
    read more
  • Insuring what matters the most: Our health

    Sep 04, 2012

    Most of us would never give up our home insurance, our car insurance, and even our life insurance. Nevertheless, when the time comes to insure our health...
    read more
  • Spousal Loans: A strategy to increase net worth and reduce tax

    Aug 01, 2012

    Consider reducing your family income tax by using a spousal loan. A spousal loan is an income splitting strategy that transfers investment income from a higher income earner... read more
    read more
  • Cottage Succession – Keeping it in the family

    Jul 06, 2012

    For most of us, there are wonderful memories attached to a family cottage. However, at some point, cottage owners will face the financial and emotional challenges of selling or transferring this cherished family asset...
    read more
  • Registered Disability Savings Plan (RDSP)

    Jun 04, 2012

    If you have a disabled child, you are likely concerned with saving for their financial stability in the future. A Registered Disability Savings Plan (RDSP) is designed to help contribute to the long term financial security for a person with a disability. As an efficient savings vehicle...
    read more
  • Win-Win: Creating your customized charitable giving strategy while reducing taxes

    May 02, 2012

    You’ve worked closely with your Richardson GMP Investment Advisor to reach your personal investment goals. Now, we can help you achieve your dream...
    read more
  • Key person insurance - Is your business protected?

    Apr 02, 2012

    As a business owner or executive you understand how critical certain employees are to your organization, but have you considered what would happen if one of your star performers became disabled or suffered death? There are many situations where insurance can provide protection for your company...
    read more
  • Strategies to save tax and maximize your wealth

    Mar 01, 2012

    Don’t wait until the last minute! Income tax season is upon us and the more organized you are, the more likely you or your tax professional will be able to take advantage of deductions and credits on your tax return to maximize your wealth. Strategies to minimize your taxes are one of the components to an integrated approach to your tax and estate planning...
    read more
  • Insuring your children

    Feb 01, 2012

    No one likes to talk about it because no one wants to entertain the thought. Parents dare not imagine for a single moment the possibility of one of their children receiving the diagnosis of a critical illness or passing away. Yet, not talking and not thinking about the financial consequences...
    read more
  • Estate Planning

    Jan 01, 2012

    Estate planning is an essential part of wealth management, particularly if your estate involves significant assets, complex issues or multi-faceted relationships...
    read more
  • Critical Illness Insurance

    Nov 01, 2011

    Critical Illness isn’t something any of us like to think about, but unfortunately it happens. Despite our progressive healthcare system, we still are faced with increased waiting periods and out of pocket expenses for additional equipment and alternative treatments...
    read more
  • The tax benefits of flow-through share investing

    Oct 01, 2011

    Investing in flow-through shares has been a popular tax reduction strategy for several years in Canada. Flow-through shares allow the issuing company to renounce or “flow through” tax expenses associated with Canadian explora­tion activities to investors...
    read more
  • Modular Benefit Plans

    Sep 01, 2011

    While the cost of group insurance continues to rise, employers are ready to accept reasonable cost increases in order to maintain competitive compensation packages that will help them attract and retain the best employees...
    read more
  • Registered Education Savings Plan

    Aug 01, 2011

    With the ever increasing cost of post secondary education, the tax-deferred growth of a Registered Education Savings Plan (RESP) and the Canada Education Savings Grant (CESG) are attractive ways to plan for this major life event...
    read more
  • Estate bond

    Jul 01, 2011

    Life Insurance can be used as an effective way of accumulating and transferring wealth. An Estate Bond is a financial planning strategy that transfers non registered savings from a tax exposed investment to an exempt life insurance policy...
    read more
  • Cottage succession

    Jun 01, 2011

    For most of us, there are wonderful memories attached to a family cottage. However, at some point, cottage owners will face the financial and emotional challenges of selling or transferring this cherished family asset...
    read more
  • Insured Annuities

    May 01, 2011

    An Insured Annuity provides a guaranteed, tax preferred income stream for as long as you live...
    read more
  • Changes to the Canada Pension Plan and Quebec Pension Plan

    Apr 01, 2011

    The Canada Pension Plan (CPP) has recently implemented changes to benefits that will be phased in gradually over a six year period beginning in January 2011. If you have not already applied for CPP retirement pension benefits...
    read more
  • Charitable giving strategies

    Mar 01, 2011

    As part of your charitable giving strategy, you should consider the tax implications to ensure that you structure your donations in the most cost-effective manner. Charitable donations can be made through gifts of cash, life insurance, or other types of property, either during your lifetime or upon your death...
    read more
  • Tax planning checklist

    Jan 01, 2011

    As we embark on a new year, people tend to turn their attention to planning for the future. While we believe that tax planning should be an integral part of the overall wealth planning...
    read more