ARTICLES  &  REVIEWS

GIC Alternatives
London Free Press

According to data collected, compiled and analyzed by the authors of the recently published “SuperFreakonomics”, people who purchase annuities live longer.

“People who buy annuities, it turns out, live longer than people who don’t, and not because people who buy annuities are healthier to start with. The evidence suggests that an annuity’s steady payout provides a little extra incentive to keep chugging along.”

But the good news doesn’t stop there. In a scholarly paper “Rational Decumulation”, economist and professors at Wharton University conclude lifetime annuities are also the most “cost effective” and “least risky” asset class for generating guaranteed retirement income for life.

Recently, a 70 year old gentleman walked into my office and expressed interest in dealing with an independent Certified Financial Planner based on the poor performance of his existing portfolio.  He said he wanted something that would produce a greater rate of return than his GIC's and still give peace-of-mind while at the same time preserving his capital for his heirs. Like many retirees, this client was exhausted by the fluctuations of being exposed to equities; in addition, he did not like the interest rates he could obtain from GIC's. He sensed that there must be something out in the financial universe that could achieve his goals of having a higher secure investment income, minimize his tax, preserve his wealth and credit or protect his estate, and he was right.

It has been referred to as a "back-to-back annuity" or "insured annuity". Done properly, this insured annuity will increase guaranteed cash flow, reduce taxable income on non-RRSP and other non-registered monies, while preserving one's overall estate.

This solution is most attractive for people 65 and older and who are relatively conservative. This solution will achieve a higher after-tax cash flow for the life of a client, and will return all their capital back to their estate or beneficiary upon their death. Depending on a person's age and health, this solution provides a minimum of 25-100% greater income on an after-tax cash flow basis, than ownership of a GIC earning a gross equivalent return of 6-9% annually.

Insured annuities are a combination of two financial instruments that create extraordinary results on a guaranteed basis. The first is a prescribed annuity. A prescribed annuity is an extremely tax-efficient return of income and interest for life. The second financial instrument of an insured annuity involves the purchase of a guaranteed Term 100 Life Insurance contract equal to the amount invested into the annuity. This guarantees the original capital, is paid back upon the death of the annuitant tax-free to the beneficiaries or the estate or charities, depending on who is named in the insurance contract or the insurance will. The secret behind why the insured annuity solution works so eloquently in producing such spectacular returns is found in the differing actuarial mortality tables used by each of these distinct financial instruments. Annuities use mortality rates found in the general population. Life insurance premiums are based on mortality rates of those who are found to be healthy enough to pass the required physical and financial examinations. Therefore, the annuity can afford to payout greater income than any other fixed income product while ensuring the original principal. Another positive impact is that the insured annuity is separated from the rest of the client's estate. This results in the death benefit passing to the beneficiaries tax-free while avoiding all probate fees. Life insurance is absolutely credit-protected, provided the proper beneficiary designation has been made. Again with proper structuring, the back-to-back annuity will minimize the claw backs of Old Age Security.

So, the 70 year old gentleman that came into my office had a $1 million non-registered investment sitting at a brokerage firm when we first met him, and he was really concerned about losing his money. In fact, the brokerage firm had delivered an average rate of about 3% per year. This produced $25,000 of after-tax income on his $1 million, investment portfolio. Today, after implementing the back-to-back annuity solution, this client receives an annual tax-free guaranteed payment of $48,000 for life. Even better, he now has an insurance policy that upon his passing will return the $1 million to his family tax-free. The insured annuity changed this man's world. It is important not to dismiss the use of the insured annuity solution as part of a holistic financial estate planning tool for conservative clients. The implementation of product allocation and layering of incomes is going to be more important as people desire stable income.

The “Insured Annuity” provides increased guaranteed cash flow, reduced taxes, a  probate-proof estate, and can insure that their inheritance goes through their bloodline.

So if you want to increase your life expectancy, buy an annuity and pass the donuts.