Available until January 1, 2017
A New Approach
A new method of structuring an insured annuity has restored its favourable results. The new approach involves combining the prescribed annuity with a Universal Life policy.
- The UL policy is funded with a single deposit to provide lifetime coverage.
- The remaining capital is then used to purchase the prescribed life annuity.
- On the death of the insured/annuitant, the annuity income ceases
- The Universal Life policy now returns the full amount of the capital to the intended beneficiaries.
How does this strategy compare with investing in a fixed term GIC?
Martha is a healthy, 75 year old widow, who wishes to leave a significant bequest to her grandchildren. The majority of her capital is invested in fixed income investments as she is very much risk adverse at this stage of her life. She has $500,000 to invest.
As an alternative to a GIC deposit she considers the Insured Annuity Strategy whereby she purchases a $500,000 Universal Life policy and pays for it in a single payment of $ 258,949. The balance of $241,051 she uses to purchase a Prescribed Life Annuity with no guarantee which pays her an annual income of $ 18,641. Due to the prescribed income treatment she would receive this income tax free.
GIC Investment (2.5%)
|Insurance Deposit||$ 258,949|
|Annuity Purchase||$ 241,051|
|Gross annual income||$ 12,500||$ 18,641|
|Tax Payable at 40%||$ 5,000||$ 0|
|Net annual income||$ 7,500||$ 18,641|
|Pre-tax equivalent ret.||2.50%||6.21%|
|Equivalent after tax yield||1.50%||3.73%|
What this comparison shows is that there would have to be an after tax yield of 3.73% to equal the annual income from the insured annuity.
Why won’t this be available for long?
Two things will change on January 1, 2017:
- The new tax treatment of prescribed annuity income will take effect, greatly reducing its tax efficiency.
- The changes to the way that Universal Life policies are taxed will no longer allow single premium deposits.
In the meantime, however, insured annuities can be structured in this way and if done prior to January 1, 2017 they will be grandfathered and therefore not affected by the new tax treatment.
Please give me a call if you think that this strategy would work for you. Or feel free to use the sharing buttons below to forward this to someone you think would benefit from this information.