Increasing Yield with “Single Deposit” Insured Annuity Solutions
Insured Annuity is a popular financial planning strategy designed to increase cash flow to your clients today while making sure they maintain funds to leave a legacy when they die.
There are many different ways to structure insured annuities, the most common being to combine a pay life annuity with a minimum level pay life insurance policy. In order to enhance the benefits available under this strategy, a number of different structures have evolved.
One such structure is the single deposit solution where the client uses a portion of the capital available to fund a single deposit insurance policy and uses the remainder of the funds to purchase a life annuity. It is important to note that side account is used in creating the single deposit solution as there is not enough investment room in the policy to shelter 100% of the planned deposit. As a result, the excess amount is moved to the side account and automatically transferred back into the policy as quickly as possible. With most single deposit solutions, side account balances will disappear by the 3rd or 4th year.
Manulife Financial has recently introduced new pricing and cost structures to InnoVision YRT rates. YRT to 100 rates have been substantially reduced and the YRT 85-20 rates have been replaced with new, less expensive YRT 85 – 15 rates. The new YRT 85-15 rates offer significant benefit in supporting single deposit Insured Annuity solutions. Consider the following example …
Helen is a female, age 70, non-smoker. She currently has $500,000 in a GIC earning 5%. She spends the interest each year. She never plans to spend the capital as her intent is to gift it when she dies.
Personal marginal tax rate – 45%
InnoVision interest rate – 2.5% (1.0% on Side Account) Annuity – 3 year guarantee
This example clearly shows that the Insured Annuity planning strategy is an effective way to increase cash flow to Helen while she is living. It also shows that based on the facts of Helen’s situation, the single deposit Insured Annuity solution provides the highest level of benefit. In order to match the single deposit Insured Annuity solution, Helen would have to earn 6.9% on the GIC to have net cash flow of $18,794.
There are many different ways to structure an Insured Annuity. Not one structure works best in all situations, but by considering the different structures available and paying attention to the new YRT 85-15 rates, you will help to ensure the highest level of benefit for your client.