Guaranteed For Life
Peter Katevatis - Mar 19, 2014
You stop in to your local grocery store on a rainy Tuesday afternoon. You pick up the necessary items you need, milk, bread, bananas, and some salad dressing for tonight’s meal. At the checkout counter you see a $5 scratch & win ticket called Set F
You stop in to your local grocery store on a rainy Tuesday afternoon. You pick up the necessary items you need, milk, bread, bananas, and some salad dressing for tonight’s meal. At the checkout counter you see a $5 scratch & win ticket called Set For Life. It has a picture of a hammock on a tropical beach with someone you can truly aspire to be. Impulse purchase, you buy a ticket… and you win!
Winning $1,000 per week for 25 years sounds like something extraordinary but it really isn’t. It’s called a term annuity.
When you buy a term annuity, you give your money to an insurance company and they parcel it back to you in set payments plus interest. It is considered a safe investment with a similar risk profile as a Guaranteed Investment Certificate (GIC). Since most of the annuity payments received ($1,000 per week) consist of your principal, you do not have to pay tax on that portion only the interest portion. Depending on your age, sex, health, etc you can generally double your after tax return from current GIC rates by purchasing an annuity.
The most common annuity is a life annuity which, if you haven’t guessed already, pays for life. So although $1,000 per week for 25 years sounds great, it might not be sufficient to support you if you live far beyond the next 25 years. A life annuity will cost a little more but it can give individuals the peace of mind knowing their future income stream is secure.
Before you rush out to contact your advisor to buy an annuity, you must realize that roses do have thorns. There are two major drawbacks to annuities. First of all, when they end their value is $0, and secondly, they cannot be reversed.
When a GIC matures you get your principal back. For example:
If you buy a 10 year $500,000 GIC it will generate $16,250/year or 3.25% (today’s rates) and after 10 years you will get your $500,000 back.
Remember that with an annuity, your end result is $0. Therefore, to compare a GIC with an annuity you need to add a $500,000 insurance policy so that when the life annuity ends (sadly, with your death) the life insurance payment returns the principal.
A $500,000 insured life annuity for a 65 year old couple would generate approximately $29,780 or 5.95% (generic example) after you deduct the insurance payments.
There is also risk with life annuities if you pass away in the early years. If this is a concern, you can buy a guaranteed 25-year insured life annuity. How does this work, you ask? If you die two years into the policy, your spouse will get the $500,000 back from the insurance company right away and then - this is a great part about this product - she or he will still receive another 23 payments of $29,780 (using the numbers from the above example).
Due to the present value of the guaranteed 25-year payments, it’s value looks like the chart below.
There are lots of different combinations of products to suit your needs. I haven’t done an exact calculation but it seems that there is a near-infinite combination of products available. I highly recommend talking to an insurance* specialist to find the right product for you.
I know and trust several individuals that can help you. I can honestly say I get $0 kickbacks and just try and find the right fit for each person. If the proper fit is with the Canaccord Estate Planning Services Ltd. team, I do earn part of the commission but it is always transparent and clear.
Please contact me if you would like to meet a trusted member of my estate team. You will be happy you had the conversation.
*Offered by Canaccord Estate Planning Services Ltd.