Insured annuity strategy guarantees an estate too
One of the big questions facing new retirees is how to protect your income during retirement while leaving something to children or grandchildren in your will. Straight annuities can provide a guaranteed stream of income, but once the annuity is paid out, there won’t be much left for beneficiaries. Luckily, there is a solution to this problem.
There is no doubt that we are living in trying times, and protecting your retirement income is top of mind for most retirees. Many opt to place at least some of their nest-egg into an annuity. An annuity is basically a contract you buy, usually from an insurance company, under which the company guarantees you’ll receive a specified income flow for a specified period of time.
Standard annuities are not designed for growth or residual value. They’re designed simply to pay out the agreed income for the duration of the contract. If you die before the contract ends, the residual will go to your beneficiaries, but that may not be much. If the contract expires before you die, the payments end and there typically is no residual.
The insured annuity
However, to get around this problem and ensure you leave an estate to your children or grandchildren, you might consider what’s called an “insured annuity.” This type of annuity has two components: a “prescribed” annuity and a life insurance policy. It typically provides more after-tax cash flow than you’d get from the dismal interest earned on a GIC in today’s market.
The insured annuity is really geared for a conservative investor with at least $100,000 invested in GIC-type assets looking for income protection. Typically, you would purchase the annuity with non-registered funds and then purchase a life insurance policy that equals the amount of capital used to purchase the annuity.
Guaranteed income plus an estate
The annuity provides you a guaranteed cash flow for life. The twist here is that you use part of the income that you get from the annuity to pay the premiums on the insurance policy. When you die, the insurance company pays the death benefit on the insurance policy to your beneficiaries, thereby replacing the capital used to purchase the annuity.
With the insured annuity strategy, then, you’ve achieved the best of both worlds – a guaranteed stream of retirement income and an estate you can leave to your heirs.
Annuities are a complex product and come with all sorts of variations. It’s best to talk to an independent financial advisor with insurance expertise to see if this strategy makes sense for you.
© 2014 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited.
