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The Money Management Newsletter: Insurance Products
Preferred tax treatment from Insured Annuities offer both flexible income options and security
A real alternative to GICs for investors fixed income needs

Compiled by David Newman, Fiscal Agents Insurance Ltd.
With files from Standard Life Assurance CO Canada
Money Management Newsletter, June 2005

Not all investors looking for higher returns on fixed income portfolios, are prepared to change the nature of their investments to equities or market-linked notes - due mostly to the added risk, or poor liquidity. So what's an alternative answer?

Perhaps the flexibility of Insured Annuities can offer some relief. Insured Annuities are not a new idea, but with the pressures on cash flows, maintaining safety with built-in guarantees are having Canadian investors looking seriously at this alternative investment. Investors with increasing demands on income can arrange a spectrum of payment options that the normal GIC doesn't. One of the most popular is to blend both the interest and principle into your monthly income payment.

What is an Insured Annuity?

The insured annuity uses two products: a "prescribed" annuity and life insurance. The prescribed annuity typically provides more after-tax cash flow than can be obtained from the interest earned under a GIC. This is due to its preferred tax treatment.

It is for conservative investors, with at least $100,000 of invested GIC-type assets who want to maximize income in a guaranteed investment - and who want to preserve the capital for their heirs.

The annuity is purchased with non-registered funds. The face amount of the life insurance typically equals the amount of the capital used to purchase the annuity.

The annuity gives you guaranteed cash flow during your lifetime. You use part of your annuity income to pay the insurance premiums. When you die, the insurance company pays the death benefit to your heirs, thereby replacing the capital used to purchase the annuity. If you choose the maximize estate option, the capital provided to your heirs can exceed the original capital invested.

Will you benefit from an Insured Annuity?

Yes, if:

You are insurable.
You want to avoid high-risk investments.
You wish to generate additional cash flow from non registered liquid assets.
You want to pass on an estate to your heirs.
You wish to maintain your cash flow but increase the estate you pass on to your heirs.

Insured Annuity vs. Guaranteed Investment Certificate (GIC)

The increased yield offered by an Insured Annuity over a GIC can be significant!

EXAMPLE 1
Female age 65
$200,000 initial investment

Insured
Annuity

GIC (5%)

Annual income (see Note 1)

$14,157

$10,000

Tax payable (see Note 2)

(1,704)

(4,500)

Annual life insurance premium (see Note 3)

(5,143)

n/a

Net annual after-tax cash flow

$7,310

$5,500

Equivalent pre-tax yield (see Note 4)

6.6%

5.0%

Additional after-tax cash flow

- in dollars

$1,810

n/a

- in percentage terms

32.9%

n/a

EXAMPLE 2
Male age 65
$200,000 initial investment

Insured
Annuity

GIC (5%)

Annual income (see Note 1)

$15,416

$10,000

Tax payable (see Note 2)

(1,472)

(4,500)

Annual life insurance premium (see Note 3)

(6,445)

n/a

Net annual after-tax cash flow

$7,499

$5,500

Equivalent pre-tax yield (see Note 4)

6.8%

5.0%

Additional after-tax cash flow

- in dollars

$1,999

n/a

- in percentage terms

36.3%

n/a

EXAMPLE 3
Male age 65, Female age 65 - $200,000 initial investment

Insured
Annuity

GIC (5%)

Annual income (see Note 1)

$12,804

$10,000

Tax payable (see Note 2)

(1,805)

(4,500)

Annual life insurance premium (see Note 3)

(2,943)

n/a

Net annual after-tax cash flow

$8,056

$5,500

Equivalent pre-tax yield (see Note 4)

7.3%

5.0%

Additional after-tax cash flow

- in dollars

$2,556

n/a

- in percentage terms

46.5%

n/a

Note 1: The annuity rate used is that in effect April 30, 2005 and is based on an annuity for life without a guarantee period, with the first payment being received one month after the purchase date. In Example 3, the annuity is assumed to be issued on a joint last to die basis, with no reduction in amount on the first death.

Note 2: Since the annuity is a prescribed annuity, tax only applies to the taxable portion (Example 1: $3,787, Example 2: $3,272, Example 3: $4,011). A 4546 tax rate is assumed.

Note 3: The Life insurance quoted is Standard Life's Universal Life Perspecta, with all premiums based on non-smoker rates.

Note 4: Equivalent pretax yield = (net annual after-tax cash flow / (1 - tax rate)) / initial investment

The examples are for illustration purposes only and are not a guarantee of the future. Actual results will differ depending on factors such as age, gender, tax bracket, current interest rates, insurability and form of annuity chosen.

The insured Annuity Advantage

Your cash flow is increased because a "prescribed" annuity pays a blend of interest and capital, with tax only being payable on the interest portion. With a GIC, the income is fully taxed as interest.
Your annuity income is guaranteed and payable for life. If you like, additional income guarantees can be added.
Your lifestyle is enhanced by using this capital to produce greater net after-tax cash flow while preserving your estate for your heirs.
On your death, the annuity payments generally cease, but the insurance policy pays your beneficiaries a death benefit, allowing the estate to recover all or a portion of the amount initially used to acquire the annuity.
Proceeds from the life insurance policy are tax-free, and will avoid probate if there's a named beneficiary.

What you should know.

Once the program is started, the annuity cannot be redeemed. Capital is only repaid at death of the insured. For more information on Insured Annuities, please contact your Fiscal Agents Insurance professional or financial advisor.

Getting Advice: We believe that financial products that have relevancy to estate matters such as a will, the designation of beneficiaries require careful planning, to ensure all essential matters are covered. Moreover, It should also be reviewed periodically and discussed with a qualified adviser or team of advisers to incorporate any changes in your personal circumstances.

Notice: Fiscal Agents Financial Services Group or Standard Life Assurance CO Canada are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this newsletter are not intended, nor should they be relied upon, to replace specific professional advice. Nothing contained in this document is intended to offer such advice or replace advice of independent counsel. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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