Insured Annuities for Wise Bloggers
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.
In either of these cases, utilizing a concept called the Insured Annuity would be perfect.
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: 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.
Insured Annuity Option:
- 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).
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.
Cost of a Term-100 $500,000 Life Insurance policy: $25,575
After-tax annuity income: $45,639
Subtract life insurance premiums: ($25,575)
Final after-tax income with the insured annuity concept: $20,064.
Bottom line: She just paid less tax to the tax-man, increased her after-tax income by over $5,000/year, and guaranteed her full principal to her beneficiaries!
- With her original situation, she was at the mercy of the prevailing interest rates determining her income. Right now it is around 4%, but it fluctuates, which makes it hard to plan.
- Since the $500,000 is paid to beneficiaries as a life insurance payment, the lengthy probate process is circumvented, and the distribution of insurance proceeds is private (read: not subject to contesting in the will).
- What if in our example, she doesn't need the income from the $500,000? She could use the annuity income to purchase an even bigger insurance policy for her heirs or charity: approx $900,000.