Planning for retirement income can be challenging, especially with unpredictable markets and low interest rates. If you’re seeking a higher and more stable income stream in retirement, an insured annuity might be the solution. This strategy combines the security of an annuity with the benefits of a life insurance policy, potentially increasing after-tax cash flow while still providing something for your heirs.
An insured annuity involves two key components:
- Annuity Purchase: Provides regular, guaranteed payments for life.
- Life Insurance Policy: Replaces the capital used to buy the annuity, ensuring your beneficiaries are taken care of.
By leveraging this approach, retirees can enjoy increased cash flow during their lifetime while maintaining the option of leaving a financial legacy.
Why Should You Consider an Insured Annuity Over Traditional Investments?
Many retirees invest conservatively in GICs (Guaranteed Investment Certificates) or other low-yield options. While these investments are stable, they often generate modest returns—particularly after taxes. With interest rates fluctuating, including potential cuts by the Bank of Canada in 2025, GICs might not provide the income retirees need.
An insured annuity, on the other hand, offers:
- Higher After-Tax Income: Annuities often provide better after-tax returns compared to GICs.
- Tax Efficiency: A portion of annuity payments is considered a tax-free return of capital.
- Peace of Mind: Regular, predictable payments for life.
- Legacy Planning: Life insurance can replace the annuity capital for heirs.
How Does an Insured Annuity Work?
Let’s break down how an insured annuity functions with a real-world example:
Example: Greg’s Retirement Income Plan
Greg, a 70-year-old retiree, currently has $250,000 invested in GICs earning 3.5% annually. Here’s how his income compares with and without an insured annuity:
| Investment Option | Annual Income (Before Tax) | Tax Paid | After-Tax Income |
|---|---|---|---|
| GIC (3.5% interest) | $8,750 | $3,062 | $5,688 |
| Insured Annuity | $17,212 | $877 | $16,335 |
By switching to an insured annuity, Greg’s after-tax cash flow increases by $10,647 annually.
To address concerns about leaving money to his family, Greg uses $5,000 of the additional income to purchase a life insurance policy, securing approximately $100,000 for his beneficiaries.
What Are the Key Benefits of an Insured Annuity?
Choosing an insured annuity for your retirement plan offers several distinct advantages:
- Increased Cashflow: More money in your pocket each month compared to traditional low-risk investments.
- Tax Advantages: Lower taxable income due to the capital return portion of annuity payments.
- Financial Legacy: Life insurance can ensure your loved ones are financially protected.
- Stability and Security: Guaranteed payments regardless of market conditions.
Who Should Consider an Insured Annuity?
An insured annuity may be ideal if you:
- Are looking for higher income in retirement.
- Want to minimize taxes on your investment returns.
- Have non-registered investments that aren’t generating enough income.
- Seek a balance between immediate cashflow and future legacy planning.
This strategy is particularly beneficial for those who prefer predictable income over market volatility and still want to leave something for their heirs.
How Can You Set Up an Insured Annuity?
Setting up an insured annuity involves several steps:
- Assess Your Financial Situation: Review your current investments and retirement goals.
- Consult a Financial Advisor: Ensure the strategy aligns with your long-term objectives.
- Purchase the Annuity: Invest a portion of your non-registered funds into an annuity.
- Buy Life Insurance: Use a portion of the annuity’s increased cash flow to secure a life insurance policy.
- Monitor and Adjust: Review your plan periodically to ensure it meets your changing needs.
FAQs
What is an insured annuity?
An insured annuity combines an annuity purchase with a life insurance policy, providing higher cash flow during retirement while preserving capital for heirs.
How does an insured annuity increase after-tax income?
It provides tax-efficient payments, as part of the income is considered a tax-free return of your initial investment.
Is an insured annuity suitable for everyone?
It’s ideal for retirees seeking stable income, tax efficiency, and the ability to leave a legacy. Consulting a financial advisor is recommended.
What happens to my money if I pass away early?
Many annuities include a guarantee period, ensuring payments continue to beneficiaries if you die within a certain timeframe.
Can I use registered funds like an RRSP to buy an insured annuity?
While possible, it’s less tax-efficient. Non-registered funds generally offer better after-tax cash flow.
How does the life insurance component work?
A portion of the annuity’s additional income is used to purchase life insurance, replacing the capital used for the annuity.
What are the risks involved with an insured annuity?
Risks include the potential loss of capital if you die beyond the guarantee period and if you choose not to purchase life insurance.
Can the payments from an insured annuity change over time?
Payments are typically fixed, offering consistent income regardless of market fluctuations.
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Aanchal is a passionate writer with a keen interest in storytelling, content creation, and creative expression. She enjoys exploring diverse topics and crafting engaging narratives that captivate readers.
