A PRESCRIPTION for What Ails Your Money?
You’re no stranger to adversity – the Covid pandemic, a cold spring and no sports or live music available! Your money has its challenges too – it battles taxes, the stock market “roller coaster” (and the impact of inflation). Also, the very low interest rates make it difficult to earn an attractive return on fixed-rate term investments. For example, the Government of Canada 10 year Bond Yield on one day recently was only 0.64% annually.
BUT what if you had a strategy to fight back…?? You may wish to consider a special type of annuity (“Insurance Annuity”) issued exclusively by life insurance companies. It is an alternative option for investors to fixed-rate term investments (such as Guaranteed Investment Certificates (“GICs”)) issued by banks.
Higher Potential Returns and Lower Investment Risk
The Insurance Annuity is a term investment whose return at maturity falls within a predetermined range that is based on the performance of a basket of well-established companies from different industry sectors. As a result, there is a higher potential investment return than with traditional fixed-rate term investments.
Also, an investor should experience peace of mind since there is a guarantee they will never receive less than the amount invested, even if the value of the underlying securities decreases, if they hold the investment until the maturity date (or pass away earlier while owing the investment).
Effectively an investor has participation in certain equities but without sacrificing the safety of their investment.
Advantages of Insurance Based Investments
Insurance based wealth products, such as the Insurance Annuity, have exclusive advantages because they are issued by a life insurance company that many people aren’t aware of.
The Investment may (depending on who is named as beneficiary) be exempt from seizure by creditors – perhaps more important than ever in today’s precarious economic climate, in case the investor ever suffers financial misfortunes or declares bankruptcy. Also, business owners, professionals and self-employed individuals may appreciate this feature since they are more likely to experience creditors making a claim against their assets.
Estate Planning Benefits
An investor can choose to designate a specific individual (instead of their estate) as beneficiary to receive the “death benefit” of the Insurance Annuity if the investor dies while owning the investment. In this case, the death benefit won’t become part of the (deceased) investor’s estate which has the following advantages:
· The death benefit would not be subject to probate fees
· It would be paid to the beneficiary more promptly
· It would be paid out confidentially which is important to investor’s who covet privacy
Also, investors who don’t wish the beneficiary to receive the entire death benefit amount immediately are able to transfer this wealth gradually instead.
The investment return on the Insurance Annuity is comprised of up to two components – income earned during the investment term (“Accrued Income”) and a gain upon maturity.
Retirement / Pensioner Tax Benefits
Potential tax savings are available for clients generally age 65 or older since the Accrued Income should be eligible for i) pension tax credits and ii) pension income splitting, which can reduce a couple’s total tax bill by shifting the tax burden on the Accrued Income to a spouse or common-law partner in a lower tax bracket.
There should be no tax liability for the first few years of the investment term since tax reporting of the investment income is deferred until later years. This tax deferral may have cash flow advantages and may be beneficial to investors who will be transitioning to a lower tax bracket in the later years.
Corporate Tax Savings for Business Owners
The Insurance Annuity can help a Canadian-controlled private corporation (“CCPC”) that earns at least $50,000 (including associated corporations) of passive investment income in the preceding year to reduce its tax bill for the current year. This is because no investment income is reportable for tax purposes in the early years of the investment term, which helps to preserve a CCPC’s eligibility, in the following years, for the small business tax rate on active business income it earns. Also, the total investment income earned from the Insurance Annuity should be concentrated into fewer years which means fewer taxation years for which access to the small business corporate tax rate may be jeopardized.
As you can see, the Insurance Annuity can allow investors to have their cake and eat it too and with lots of icing on top! This strategy is worth considering for conservative investors who are in, or preparing for, retirement or are a business owner or have a corporation with surplus funds. It can also provide a steady retirement income stream and there are no management fees.
NOTE: The Insurance Annuity is also available for registered accounts such as RRSPs, RRIFs and TFSAs.