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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 an 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:
The 70 year-old female who has $300,000 buys a Prescribed annuity with the $300,000 she had sitting in a 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 at 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 it is less than what 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 $6,300 she was left after taxes 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 she won’t be able to leave her children the $300,000 that she could have with the GIC. In fact, a regular Life Annuity will not leave any of that $300,000 to her kids, since the Insurance Company will keep whatever is left of her capital on her death.

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 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. These 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.

The Insured Annuity Advantage:
Your cash flow is increased because a prescribed annuity pays a blend of interest and capital, with tax only being payable on the interest portion. Vs. a GIC were the income is fully taxed as interest.

Your annuity income is guaranteed and payable for life.

If you like, additional income guarantees can be added.

Your lifestyle is enhanced by using this capital to produce greater net after-tax cash flow while preserving your estate for your heirs.

On your death, the annuity payments generally cease, but the insurance policy pays your beneficiaries a death benefit, allowing the estate to recover of the amount initially used to acquire the annuity.

Proceeds from your life insurance policy are tax-free and will avoid probate if there’s a named beneficiary.

Corporate Situations:
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.

Disclaimer: Annuity payouts are based the day it is requested on rates that may change every day and on other factors, the numbers shown above are jus for illustrative purposes.