The Insured Annuity
Maximize After-Tax Retirement Income
How do you make sense of all the financial planning strategies there are to choose from? Like most Canadians, you want to maximize the earning potential of your money, live the retirement lifestyle you’ve imagined and leave a legacy that lasts. A powerful strategy to consider – the insured annuity.
What Are Annuities? An annuity is a contract that binds an issuer to deliver a steady stream of income payments in return for a lump sum deposit. These payments can be set up to last an entire lifetime (a life annuity) – or for a set period of time (a term certain annuity).
Understanding an Insured Annuity An insured annuity combines two individual products: a life annuity contract and a life insurance policy.
A life annuity usually provides a much higher level of income than other types of investments because, as described, it combines your original capital with interest. However, that means there is no more capital for your family when you pass away (assuming there is no guarantee period or that it has expired).
By using a portion of each annuity payment to pay premiums on a life insurance policy, you can ensure that an amount equal to your original capital is restored when you die. Therefore, you receive a guaranteed stream of income plus a return of your initial deposit, as you would with a fixed-income investment like a GIC or bond, but with greater return potential.
The Insured Annuity Can:
Maximize after-tax retirement income without increasing investment risk
Earn a pre-tax equivalent yield, likely unattainable with today’s fixed income investments
Lower taxes and increase your chances of securing government benefits
Create a guaranteed income that lasts an entire lifetime
Eliminate the inconvenience of reinvestment
Tax Advantages Mean Increased Income
With the insured annuity, only the interest portion of each payment is taxable every year. In comparison, when you purchase a GIC, any income, whether it is received or reinvested, is considered to be taxable. In many cases, even after paying the insurance premiums, the resulting income is higher than the net income achieved by a GIC or similar investment. And since the taxable income is lower, you may still be eligible for government-sponsored benefits, such as Old Age Security (OAS). IMPORTANT TO NOTE: Tax changes are coming on January 1st, 2017, which will reduce the current tax efficiency of annuity income, when using non-registered monies (non-RRSP, or non-RRIF). There’s still time before these changes come into law to speak to your advisor to discuss the benefits and importance of annuities and other fixed-income investments for your retirement income needs.
Avoiding Probate: With an insured annuity, insurance proceeds can be issued directly to a named beneficiary or beneficiaries, without cost or delay. Regular investments form a part of your estate and must go through the entire probate process before they are distributed. This can mean additional costs, such as probate and executor fees, and delays in allocating your money according to your wishes.
Think Long term: Keep in mind that this rate of return is guaranteed for life. That means you avoid the hassle of shopping for the highest rate at renewal time. One thing to remember is that your capital remains locked in; once you invest your money in an annuity, it cannot be withdrawn. For this reason, it’s wise to invest only a specific portion of your total capital – an amount you are comfortable with and know you will not need access to.
If you are a healthy individual between the ages of 55 and 85, you can potentially reap the benefits of an insured annuity. The example below compares the monthly income earned by a GIC and an insured annuity.
$250,000 annuity, based on an individual, non-smoking male, age 65. Rates effective 12/10/2015 and are for illustrative purposes only.
**Rates [and/or yields] as of 12/10/2015. Rates [and/or yields] are subject to change and availability. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. Insurance products are offered through RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC Wealth Management Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC Wealth Management Financial Services Inc.