At a time when equity markets are experiencing high volatility, many believe that the safe alternative appears to be low return, highly taxed GICs. However; many seniors are now discovering how to increase their guaranteed yields by using the insured annuity strategy.

There are two components to the Insured Annuity strategy: a non-registered annuity (ie, not an RRSP or RRIF) and a life insurance policy.

1. The annuity which pays the highest income is one that ceases upon the death of the annuitant with no survivor benefits. A non-registered annuity also receives favourable tax treatment.

2. The life insurance is used to return the capital to the estate upon death.

The following is an example of how this strategy works:

James is a 74 year old retired business owner who has accumulated assets which allows him to live a comfortable life. In an effort to preserve capital for his children, he is now investing conservatively and has more than $1,000,000 invested in GICs.

Today a competitive 5 year GIC would pay about 2.5% per year. However, let’s assume James has a GIC that pays an exceptionally high rate of 4% per year and that he has retired at the same income tax bracket as when he was working.

That means on a $1,000,000 GIC he receives $40,000 in interest. After paying $17,480 in income tax he is left with disposable income in the amount of $22,520.

Let’s compare this after tax income with that derived from the insured annuity strategy.

James applies for a $1,000,000 life insurance policy and since he is in relatively good health as an active 74 year old, in all likelihood, the policy will be issued at standard rates. He then purchases a $1,000,000 life annuity with no survivor benefits. The annuity pays him an annual income of $87,156.

Out of this annuity payment, the life insurance premium of $53,296 is paid leaving James with a gross income of $33,860. The total amount of income tax on the annuity payment based on the prescribed annuity tax law is $0 resulting in a net income of $33,860. This is an annual pre-tax equivalent yield of 6.76% compared to 4% on the GIC.

This is a guaranteed transaction: Guaranteed income while James is alive and a guaranteed $1,000,000 life insurance benefit upon his death with no ongoing management or cost.

The Insured Annuity is a recognized strategy for mature investors who wish to increase the yield on their guaranteed income producing investments.

For those who also wish to benefit their favourite charity by donating the insurance policy to a charity the annual income results achieved are even more rewarding because the premiums paid to the policy become tax deductible.

This example is based on an investment of $1,000,000 and a tax rate of 49.97%