Insured Annuities: Yes you can have your cake and eat it too, here is
So here is a little secret that most insurance companies will not discuss with
clients. The concept annuities, is basically a contrast idea of Life Insurance.
Life insurance pays for a premature death and an annuity pays for longevity.
Clients pay an annually premium to have the security of a lump sum in case
of a death. However, under an annuity, client would exchange a lump sum
and receive a guaranteed income for life.
The need for life insurance is to protect a young family in case of a death
and an annuity will give you an income if you live long and are concerned
about having sufficient income for life. There are many factors today that
give rise to an insecurity of not having enough income to last through out
your lifetime such as advancement in science, longevity, low interest rates,
demographics of our current labour force. However the concept of an
insured annuity takes care of all these concerns.
So to understand this concept a bit further lets look at an example. Client
Mr. Smith buys a life insurance policy for one million dollars at his age 45.
Pays about 25% of his death benefit as his premium to pay off this policy in
20 years. So client’s investment was 250K aproximately into his 1 Million
dollar life policy which increases in value as Mr. Smith lives beyond his age
65. If he lives up to a life expectancy of 85, this policy is not worth 2.5
million so really the cost of his life policy based on this example was really
When Mr. Smith retires, he has about one million dollars in his registered
and 500K in his non-registered account. With this 1.5 mill, Mr. Smith can
buy an annuity for half this amount (you are not advised to buy annuity of
all retirement value available) and receive a guaranteed income of around
42,000/year (depending on the prevailing interest rate) for the rest of his life.
Annuities will not stop paying until the last day and if it is a joint annuity,
for a nominal cost it will pay till the last day of surviving spouse. When Mr.
Smith passes, his life insurance will pay out a tax free amount of 2.5
Million. So by investing the right amount at the right time into these two
tax efficient products, Mr. Smith is able to have his cake of 2.5mill and
enjoy the full value of his retirement savings while he is alive with
guaranteed income to protect from all risks (Longevity, interest rates,
In this case, Mr. Smith may even benefit from having a blended income of
registered and non registered to reduce his tax bracket. So passing on wealth
to his next generation is easy through this planning of Insured Annuity.
However, one thing you need to plan early is life buy insurance when you
are young and healthy otherwise you may be a deselected risk for an
insurance company. Also, while planning you will have to work with two
separate companies as taking both death and longevity risk for an insurance
company may not match their risk appetite as this may turn into a no gain
concept for the insurer.
For many other such financial planning strategies, please do not hesitate and
contact us immediately at www.WEFCI.com or by calling Seema Sharma,
MBA, CFP, CLU, CHS at 647-9689334.