Enhancing income with Corporate Insured Annuity structures

Advisors market the Corporate Insured Annuity (CIA) concept with the goal of helping clients maximize the income they receive today from invested assets, while preserving their investment capital for their estate/beneficiaries when they die.

Consider the following example:

Ms. Shareholder is a 73-year-old female with a Healthstyle rating of three (HS3). Her corporation has $500,000 in a GIC earning 4%. The corporation is paying a dividend to her using the after-tax interest from the GIC.

The corporate tax rate on investment income is 46.17% and her personal dividend tax rate is 32.57%. Based on these assumptions, Ms. Shareholder is receiving net dividends of $10,856 each year. And when she dies, the GIC will provide a net estate value of $337,150. This amount does not reflect any post-mortem estate planning that may be available in the particular circumstances.

As an alternative to the GIC, the CIA concept has Ms. Shareholder use the funds to purchase a life insurance policy and a non-prescribed annuity. The typical solution would include a

$500,000 life insurance policy (level death benefit, pay for life) backed by a $500,000 pay life annuity.

Based on these assumptions, this solution would provide Ms. Shareholder with net income that is approximately $800 less than that received from the GIC. At death, the net estate value from the CIA is $500,000 or approximately 48% more than what the GIC will provide.

Houston, we have a problem.

For most clients, the main reason for implementing the CIA concept is to increase cash flow while living. Unfortunately, this typical CIA solution does not accomplish this.

Is there a way to structure the CIA so it provides a higher cash flow while living?

An alternative – Corporate Insured Annuity with a reduced face amount

If the goal of the CIA concept is to maximize cash flow, an alternate strategy is to reduce the face amount of the insurance policy, so that at death the CIA provides a net estate value that is equal to or greater than that of the GIC.

Reducing the face amount of the insurance policy reduces insurance costs. By reducing insurance costs, more income from the annuity is available to provide Ms. Shareholder with cash flow.

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Based on the example above, consider a reduced face amount solution using a $350,000 life insurance policy. On an after-tax basis, Ms. Shareholder’s cash flow from the CIA will be, on average, $3,000 more than what she would receive from the GIC.

This is a significant increase from the typical CIA solution most often used. Plus, at death, the net estate value is greater than or equal to the amount received from the GIC.

Securing a reduced face amount CIA illustration

A reduced face amount Corporate Insured Annuity illustration is a custom concept illustration available from the head office Tax & Estate Planning Group. Contact your Manulife wholesaler to secure an illustration.

January 2013