A 5% GIC? Is it a thing? Let us look at Insured Annuities

Michael Bronstine

With the Insured Annuity, not only can you immediately increase your income, but it is guaranteed for the rest of your life.

The Insured Annuity can significantly enhance the net income you can otherwise earn in fixed income investments, such as money market, GICs, term deposits or bonds. As well, since the proceeds are directed to your heirs and not to your estate, you can eliminate a variety of fees and significant delays, both of which can be associated with the probate process.

What is an insured annuity?

The Insured Annuity combines the benefits of two insurance products – a prescribed life annuity and permanent life insurance coverage. The annuity provides you with a steady, level income stream for your entire lifetime (like a government/teacher pension). A portion of that income is used to pay premiums on the insurance coverage that ensures that you maintain your original capital for your beneficiaries (like a GIC).

Can anyone do this?

Short answer is no – this is suitable for people between ages 60 and 80 who have non-registered money invested in GICs and bonds. Generally you should have taxable income above $50,000 otherwise the rate of return doesn’t work.

What is the rate of return?

It depends on your age and tax bracket. The average return is between 3.5% and 5.5%. The returns are even higher if you plan on leaving the money to a charity.

Is their interest rate risk?

Insured annuities are guaranteed for entire lifetime without reinvestment worries. Some fixed income investments may be guaranteed for term of investment and may be subject to interest rate risk at maturity.

How is the money taxed?

It is more tax efficient – only a portion of insured annuity income is taxable because a portion is a return of your original capital. This may lower your marginal tax rate. Interest income in GICs/bonds is taxable at your highest marginal tax rate.

What happens when I pass away?

Your capital goes direct to beneficiaries and avoids all probate costs and delays. With GICs that capital goes to the estate but may be subject to probate costs and delays.

Should I put all my GIC money into this?

It is not advisable to invest all your savings into any one product, whether it is a mutual fund, stock, bond, or the Insured Annuity, no matter how good it may look. Diversification is the cornerstone of a strong investment portfolio. Second, the purchase of the annuity is not reversible; once you make that decision it is final.

What if I’m leaving my money to charity? or I give money to charity each year?

The returns are even higher! If you have any philanthropic intentions, you can achieve additional benefits by paying premiums for an insurance policy that is owned by a registered charity. The resulting tax credit can add to your net income while you follow through with your desire to donate to a registered charitable organization.

What is the catch?

The capital is unavailable after purchase. Annuities are not a liquid asset. That is why you shouldn’t put all your money into it. Because annuities include an insurance product, medical underwriting is required.

Final thoughts:

With the Insured Annuity, not only can you immediately increase your income, but it is guaranteed for the rest of your life. You don’t even have to concern yourself with rolling over your investments, worrying about what prevailing interest rates will be when that time comes and the hassle of getting it done. Once the Insured Annuity is established it will run on its own for the rest of your life. Simple and hassle-free. That’s a luxury we all deserve in our retirement years.