3 The Insured Annuity concept allows older clients to eliminate investment risk, earn a higher after-tax income and guarantee the estate they leave behind.
4 Agenda – Insured Annuity OverviewWhat it isWho it’s forHow it worksCase Study 1 – Increase income and preserve capitalCase Study 2 – Maximizing an estate.Planning ConsiderationsConclusion
5 The Insured Annuity – What is it? Non-registered assets are placed in a Life Annuity with prescribed taxation.Life Insurance is purchased to replace the non-registered asset upon death.The tax free death benefit of Life Insurance combined with the tax advantages of Life Annuities increases income and the value of the estateAn interest bearing asset is transferred into a single premium immediate annuity with prescribed taxation. Prescribed Taxation defers the tax on the interest that is earned in early years and spreads the tax liability out over the annuitants lifetime. The reason for this is that normally the initial annual payments consists largely of interest, which is taxable. In later years the balance shifts towards the bulk of the annual payment being principal. This is the situation with Accrual taxation. Because prescribed taxation spreads ther tax liabilty out evenly over the annuitants lifetime, tax is effectively deferred an overall income is increased.
6 Who’s it For? Clients over age 60 Are concerned about Taxes Income Preservation of capitalLeaving an estateInvestment Risk
7 Single Premium Immediate Annuities Income is 100% Guaranteed for the life of the annuitant.Annuity income will continue to a beneficiary for up to ten years if the annuitant dies prematurely.Beneficiary can elect to receive a commuted value instead of the payment stream.Commuted value is the present value of any remaining payments in the guarantee period. The exact interest rate used to calculate the present value of payments would be determined at time of death and will vary. Generally speaking it is a weighted average of the rates in effect at the time the annuity was purchased and the rates in effect at the time of death. Of course the beneficiary can elect to receive the remaining payments for the remainder of the guarantee period which are 100% guaranteed in the annuity contract.
8 Prescribed vs. AccrualHere we see a graphical representation of after tax income under prescribed taxation and accrual taxation. This is a life annuity for a 70 year old female, $100,000 single deposit. As we can there is substantially more after tax income in the early years and accrual taxation only surpasses as the client approaches life expectancy. Overall, in Present Value terms, much more income will be received from the prescribed taxation annuity.
10 Case StudyCurrently, she uses the interest income from her GIC’s to supplement her pension income.She does not wish to spend the capital but to leave the $250,000 to her Grandchildren.Her income from her investments is fully taxable at her marginal tax rate of 40%.Meet Margaret…65 Years oldSingle.Retired and drawing income from her pensions.Very conservative - invests exclusively in fixed income.Has $250,000 in non-registered investments.Margaret
11 Current Situation Gross Annual Income – $11,500 250,000 GIC – Current Yield 4.60%246,250 will pass to grandchildren after probate fees**Based on Prov. Of Ontario probate fees, most other provinces have lower probate fees than Ontario, Quebec has no probate fees.$125,000 will pass through estate and then to grandchildrenMinus Income Tax - $4,600Net Annual Income - $6,900
12 Insured Annuity Alternative Places $250,000 in Life Annuity with a Ten Year GuaranteeClient will use some of the income to purchase Universal Solutions.Universal Solutions will be minimum funded for life.The client will be able to increase her after tax income plus fully fund an inheritance for her grandchildren.Annuity will have Prescribed Taxation.
13 Female 69 non-smoker Level COI, Standard Underwriting Coverage Plus Death BenefitMinimum Funded for LifeConservative Rate of Return of 4.0% in fixed income.A policy constructed in this manner will not lapse, even if the rate of the return is lower than 4.0%. The annuity will guarantee that the minimum premium is always paid. Because the COI is level the policy cannot lapse as long as this minimum premium is paid.
14 Insured Annuity Advantage $250,00 Placed in Life 10 AnnuityGross Annual Income – $18,659*$254,300 passes to grandchildren - no taxes, no probate fees*$128,226 is based on death occurring at life expectancy: age 85 with coverage plus Universal Solutions with Level COI and a rate of return of 4.0%.Minus Income Tax - $2,628$7,173 used to purchase ULNet Annual Income - $8,858
15 Insured Annuity Advantage Gross annuity incomeAnnuity Income After TaxUniversal Solutions PremiumsNet Annuity IncomeAmount Paid to Estate*70$18,658$2,628$7,173$8,857$335,56475$251,67380$252,84285$254,300*This includes the commuted value of the Ten Year Guarantee on the Life Annuity. Commuted Values are determined by Maritime at time of death. The values shown here are for illustration purposes only.
17 Superior Estate Values Estate with GIC – $246,250*Includes commuted value of ten year guarantee on annuity payments should death occur before the end of the guarantee period.
18 The Ideal Solution Universal Solutions Offers: Level Guaranteed COI Attractive GIA optionsWide Range of index options availableGuaranteed Policy FeesGuaranteed MER’sGuaranteed availability of investment optionsDeath Benefit Guarantee
19 The Ideal Solution con’t The Death Benefit Guarantee is of particular interest to Margaret:The purpose of the insurance is to leave an estate.Margaret is a very conservative investor, however:The Death Benefit Guarantee allows her to take advantage of higher returns of equity indexesHer estate can benefit from the upside of equity markets while being protected from downturns.The annuity will fully guarantee her income and the Death Benefit Guarantee will fully protect her deposits into the index linked account. Because of these guarantees, Margaret can be assured he original capital will pass to her estate so she may want to take advantage of the higher potential returns of the Stock Market.
20 ConclusionMargaret was able to increase her after tax income from her investment.Leave a larger estate - fully guaranteedUsing the security of the Death Benefit Guarantee, she can take advantage of Index Linked Accounts.Avoid probate fees.
21 Case Study Bob and Joan Hill They are High Net Worth retirees. Top marginal tax bracket of 46%.They have $500,000 that they are confident they will not need for themselves.They would like to use these unsheltered funds to create an estateBob and Joan HillWell into RetirementHe is 75 and she is 74 years of age.Have more than enough retirement assets to last the rest of their lives.Wish to leave a sizable estate to their family.Very conservative investors.
22 Current Situation Gross Annual Income - $25,000 $500,000 Income portfolio - yield 5.00%Compounded annually – after tax rate of return: 2.70%Minus Income Tax - $11,500$754,281 will pass to estate after probate fees*Net Annual Income - $13,500*Assumes death occurs at age 90. Based on Prov. Of Ontario probate fees, most other provinces have lower probate fees than Ontario. Quebec has no probate fees.
23 The Insured Annuity Alternative $500,000 is placed in Single Premium Immediate Annuity.Entire Income from annuity is placed into Universal Solutions.Universal Solutions is:Initial Face Amount: $1,260,000Coverage PlusMinimum Funded for LifeLevel COI (No capital Adjustment)Conservative investment with a 4.0% rate of return
24 Insured Annuity Advantage Gross annuity incomeTax Payable on Annuity IncomeNet Annuity IncomeUniversal Solutions PremiumAmount Paid to Estate*80$42,277$5,242$37,035$21,088$1,448,01585$1,270,25990$1,276,90695$1,285,197*This includes the commuted value of the ten year guarantee on the life annuity. Commuted values are determined by Maritime at time of death. The values shown here are for illustration purposes only.
26 ConclusionUsing the tax efficiencies of Universal Life contracts and single premium immediate annuities…The Hill’s were able to significantly improve the value of their estate by using the insured annuity concept.At age 90 their estate would be worth 31% more with the Insured Annuity concept.The Insured Annuity concept will bypass the expense and delay of probate.
28 Things to ConsiderClients need to understand that an annuity will lock in their capital.Therefore, they need to make sure there is adequate liquidityIf there is no income requirement and the objective is to maximize their estate, consider the Estate Creator with Universal Solutions.
29 Special QuotesTerm to 100 may be considered but would require a special quote if it is used within the Insured Annuity concept. Minimum case size – Premium of $15,000.If clients are over age 80 and it is a joint last to die case, annuities are available with a guarantee to age 90 on a special quote basis. This allows Prescribed Taxation.Special quote will be required for annuitants over age 80 with a guarantee period to age 90. Minimum case size $250,000.00