Structuring a joint Insured Annuity
The Insured Annuity is a financial planning strategy designed to increase cash flow to your clients when they’re alive while making sure they have funds to leave a legacy when they die. A typical scenario is that your client has conservative interest-bearing investments. The interest income is spent in retirement, but the capital is earmarked for their heirs or favourite charity at death. The Insured Annuity strategy has your client liquidate these investments and use the funds to purchase a prescribed annuity and exempt life insurance policy. The annuity payment pays the life insurance premium and the tax on the annuity with the remaining amount providing income during retirement. When your client dies, the life insurance proceeds pay for a gift to your client’s heirs or favourite charity.
In many situations, the strategy is structured jointly, combining a joint annuity with a joint life insurance policy, typically for a husband and wife. The standard approach to a joint insured annuity is to structure the joint annuity with no reduction in payment on first death combined with a joint last-to-die life insurance policy with premiums payable to last death. A few years ago, a new joint structure was uncovered that provided higher cash flows than the standard approach. This approach was to structure the joint annuity with a percentage reduction in payment on first death combined with a joint last-to-die Signet policy with premiums payable to first death. The percentage reduction on the annuity was determined through trial and error. The amount of reduction would ensure similar income benefits before and after a death occurs.
Recently, the joint last-to-die with premiums payable to first death option was removed from Signet. A question we are now frequently asked is “Since Signet has lost this option, is this creative approach to structuring an Insured Annuity dead?” InnoVision offers the same joint structure (joint last-to-die with costs payable to first death), but the InnoVision costs for this structure are higher than what they were for Signet. As a result, these higher costs may not provide as high a level of benefit as what was available using Signet. Here’s an example:
Mr. Smith Male 75 NS
Mrs. Smith Female 70 NS
Personal tax rate 45%
Funds available $1,000,000
Annuity income (joint annuity, no reduction in payments) $78,685 (taxable amount $22,819) Annuity income (joint annuity, 46% reduction on 1st death) $96,236 (taxable amount $24,296) InnoVision premium (joint last – costs to last death) $22,350
InnoVision premium (joint last – costs to 1st death) $38,989
Summary of net cash flows:
Insured Annuity (no reduction – standard approach) $46,066 Insured Annuity (46% reduction – before 1st death) $46,314 Insured Annuity (46% reduction – after 1st death) $46,064
Based on this example, the InnoVision solution using joint last-to-die with costs payable to first death only provides a nominal increase in benefit prior to first death. After first death, the benefit is a bit lower than the standard approach. When working on a joint Insured Annuity situation, InnoVision can be an effective product for providing the life insurance portion of the strategy. But whether or not it can be creatively used to increase benefits over the standard approach must be determined on a case-by-case basis.