Annuities

What are annuities? And how do they work?

Have Your Cake And Eat It Too With Insured Annuities

Today’s seniors are often concerned with covering their living expenses while still preserving their hard-earned capital for their beneficiaries. They are also typically more conservative investors, not willing to bet their life savings on higher risk/reward investments.

Yet they don’t have enough money to kick off an income that will provide for their expenses without encroaching on the capital itself.

Or, they have loads of money, but are paying tax year over year on the interest income, and are sick of seeing a chunk of their cash going to the taxman.

The Insured Annuity is a concept that involves the use of two different insurance products; an Annuity to provide tax-preferred lifetime income, and Life Insurance to guarantee the capital.

The best way to demonstrate this concept is with numbers:

Primary Market

Insured Option

Is this too good to be true? Right now, yes. She has given up the full $500,000, and currently has nothing to give to her heirs. To get around this, she purchases a $500,000 Life Insurance policy.

Single seniors aged 65+, with heirs

Desire for the highest possible guaranteed revenue stream

Wants to leave something for their heirs

Looking to minimize taxes

Desires safety against volatile markets

Example: Female, aged 77, 2 children and 3 grandchildren

$500,000 in assets, invested in secure investments yielding 4% interest/year
Wants to leave the full $500,000 to her heirs
For illustration purposes, assume she is in a 25% tax bracket

Given her current situation, her annual income from the $500,000 is $20,000, fully taxable. After tax, she receives $15,000.

Purchase a $500,000 Life Annuity with a 10 year guarantee option. (This means she gives up the $500,000 to the insurance company, who in turn uses it to provide her with a steady lifetime guaranteed income. If she dies in the first 10 years, the insurance company will guarantee the 10 years of payments to her estate).

Annual income from the annuity: $48,031

Taxable portion: $9,569

After-tax income from the annuity: $45,639 (The taxable portion is so small, because the insurance company is paying out part capital, part interest as the annual income).