Given the frequency of extreme market fluctuations over the past few years, it?s no surprise that investors are growing weary of volatility.
Unfortunately, the instability has caused many to panic, pull out of the markets and sit on their cash. However, with inflation eroding remaining portfolio value, that?s an unsustainable long-term solution.
Market volatility has been toughest to stomach for those nearing or in retirement. Returns on cash are not enough to meet retirement goals, but being fully invested in the markets is not always suitable.
Older investors are at a crossroads, trying to decide how to protect their portfolios while generating a consistent income stream. Some estate planning can help.
Insured annuities complement other income sources by providing stability and improving conservative portfolios. They?re a one-time investment that pays guaranteed income for life while achieving higher income, lowering taxes, preserving capital and providing a tax-free transfer to beneficiaries. With guaranteed lifetime payments, an insured annuity addresses the worry of outliving one?s retirement funds.
An insured annuity is made up of a life annuity contract and a life insurance policy. They are bought simultaneously, with the annuitant as the life-insured. The annuity generates the cash flow needed to pay both the life insurance premium and the income tax on the annuity.
The tax advantages are significant. Generally, the older the annuitant the larger the payment. But, unlike a GIC, only a portion of the annuity payment received is taxable. When non-registered funds are used, the preferential tax treatment can generate advantages. Because a smaller portion of the income is deemed to be taxable, old age security clawbacks also may be lowered or eliminated.
Let?s look at the basics for a 70-year-old, non-smoking female who buys a $500,000 insured annuity at current rates and has a high marginal tax rate of 43.7%.
Her insured annuity pays out $38,625.72 per year at prescribed terms. She pays insurance premiums, but, because her annuity payment includes return of capital, only a portion of it is taxable. The annual net cash flow after these deductions would be $18,015 or 3.60% after-tax and expense yield.
If our subject bought a $500,000 GIC with a 4.0% rate of return, the results would not be nearly as good. Although she would have only taxes to pay, they?re much higher. The GIC?s annual net cash flow would be $11,260 or 2.25% after-tax and expense yield.
For this senior, the insured annuity has an annual net cash flow 60% higher than the GIC.
Her named beneficiary also receives advantages.
In addition to being tax-free, the end-of-life insurance payment is not considered part of the estate. Therefore it?s paid directly to the beneficiary, bypassing probate and avoiding costs and delays associated with administering the estate. It?s also protected from creditors.
As straightforward as this process sounds, there will be some variables in the rules and annuity rates, so investors should get qualified advice to ensure they fully understand the concept. ?
