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An Overlooked Retirement Planning Tool

Published on: January 27th, 2015

Times are changing and so are the ways that you should plan for your retirement. At one time, most people could count on either a pension or fixed-income investments for sustainable retirement income. But with today’s low interest rates and disappearing defined benefit plans, it’s a different story.

Some of the traditional lower risk tools may not give you the income you would like but we do have more options. There is one tool that is often overlooked but fits the bill if your main goal is to maximize your income.

But first, let’s see if you fit the profile of an ideal candidate:

  • You are at least 60 years of age, retired, and in a medium or high tax bracket
  • You depend on income from non-registered investments to supplement your retirement income
  • You would take comfort in knowing that part of your portfolio provides a guaranteed fixed income, avoiding investment volatility and risk
  • You don’t want to encroach on your capital, and especially don’t want to outlive your savings
  • You’re of average health for your age and qualify for life insurance

Your solution? An insured annuity.

An insured annuity sounds complicated, but it’s really quite simple. It’s a solution that uses two easy-to understand products – a life annuity and life insurance. A life annuity is a product you purchase with a lump sum of non-registered funds, in return for a guaranteed lifelong stream of equal payments. The payments are part interest, part return of capital—and that has a significant tax advantage. Tax is only payable on the interest portion and we are able to spread out the interest in equal parts over the lifetime of the annuity. That’s the annuity half. But if that’s all you did, you would now be risking your capital should something happen to you sooner than it should. Which brings us to the insurance half.

You purchase a policy that has the same value as your annuity or an amount that you want to preserve for your spouse, heirs or charity. Buying a $250,000 life annuity? Then get a $250,000 life insurance policy. That amount is paid upon death to your beneficiary, tax-free. In other words, the capital originally invested in the annuity is recovered. So you receive greater payments throughout retirement than you would receive from fixed-income investments and your hard-earned savings are passed along as tax-free.

Let’s talk about the benefits.

In addition to increasing your income and protecting your capital, insured annuities also provide the following benefits:

  • Your income is fully guaranteed for life
  • You diversify your retirement portfolio with a risk-free investment that’s not dependent on stock or bond market performance, or even on interest rate movement
  • When you direct the tax-free life insurance proceeds to your beneficiaries instead of your estate, you avoid probate fees and other costs and delays
  • A single insured annuity can be established for both you and your spouse
  • The annuity income qualifies for the pension income tax credit, which is granted on the first $1,000 of eligible pension income when you’re 65 and over
  • An insured annuity can minimize the clawback of Old Age Security benefits, because it reduces taxable income
  • You can donate all or part of the tax-free proceeds to a charity, either choosing charitable donation receipts that reduce your tax annually, or by having the donation provide tax relief to your estate

Still have questions? Talk to your advisor to help you decide if an insured annuity is the right fit for you.

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