Annuities"Annuities provide a guaranteed income stream for life". American visitors Click Here ==> Annunities and Financial Planning For Americans Case StudyYou are a 65 year old male nonsmoker, your spouse is 62 also a nonsmoker. You have $250,000. You want an income from it, but you want the principle to go to your beneficiaries, when you die.You are risk adverse and do not want to expose your cash to the market. GICs seem like the only answer, but the pay so little. If you buy a “Prescribed Annuity,” you would receive a way better income, but there would be nothing left for the beneficiaries when you die. What to do? You buy a “Prescribed Annuity” and a “joint last to die” Universal Life policy. Have your cake and eat it too!
About AnnuitiesThe entity that issues the annuity--normally a life Insurance company--does so by gathering a large pool of people all the same age and same sex and accepts a lump sum deposit from each member of this group.This money is then pooled together, invested by the Insurance company to earn a rate of return. Each person receives a set amount of cash each month, quarter, or year until they pass away. Some of these folks will live one year others will live forty, but the Insurance company guarantees regardless of how long you live you will receive your payment. There are two main types:Term CertainThis type of contract has a clause which guarantees a specified number of payments. If the annuitant passes away the income stream will continue to the end of the term or be paid out to the beneficiaries as a lump sum.ExampleThe Annuitant buys a a 10 year Term certain annuity and receives her income for 5 years, then passes a way. The contract continues to pay the beneficiaries for the remaining 5 years left on the contract or as a commuted value-lump sum-of the remaining balance. LifeThis contract means the annuitant will receive her cash until she dies, then the payments stop. If the annuitant is in poor health. The Insurance company can issue the contract as an “impaired annuity”, because of the expected shorten life span the annuitant would receive a higher then standard payment. Women tend to receive a slightly smaller payment, because of their longer life span. All Life annuities are of two classes:Immediate:This means the payments begin when the single premium is paid. Either the next month, or three months, or one year. Depending on how the payout is structured.Deferred:This form of contract is the buy now get paid later program. The annuitant funds the contract over time--the accumulation period--either with a lump sum payment or with level premiums over the period of years until the annuity is scheduled to begin. Variable:This is a Segregated Fund. Payouts are based on the underlying investments and as such vary with type of investment and stock market volatility. Income expectedPayments are based on the frequency--monthly, quarterly, yearly--of the payment selected,the age and sex of the annuitant. This determines how much the payment will be.If we calculate out it roughly works out to about an 8% rate of return on the investment.Disclaimer - this is an estimate. Ask an Insurance professional to give you a quote for your situation. Forms of Payments Straight LifeThis pays the highest amount to the annuitant, while they live and ceases when they die. Life time with a Guaranteed Number of payments.Pays income to annuitant until death, then pays beneficiary until guarantee period is over. Joint and last survivorThis pays out to two or more people, with payments continuing until all annuitants have passed on. Commonly used for couples. Some contracts can have a clause which includes a Life Insurance death benefit, which is over and above return of premium or payout of cash surrender value--CSV. Prescribedhas level interest. The formula used, apportions return of capital with the interest portion to each payment, to spread the taxable amount of the payment over the life of the contract. This reduces the interest-taxable portion of the payment, effectively reducing the annuitant’s tax. To Qualify for this type of contract certain conditions must be met: The payment must remain level, except in the case of a joint contract. Where a survivor may be entitled to a smaller payment. Payments must start within the calender year at the end of the annuity frequency selected:
The guaranteed period must not extend past the 91st birthday of the youngest annuitant. All contracts are this type-unless you request otherwise. If you borrowed the money to buy the contract, you would want the taxable portion coming out early so you could offset the tax against the loan interest which is Tax deductible. Top of Page
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232 The above example is an illustration of a strategy you can use. The income and duration of the contract will depend on factors like your age, health, current interest rates,and type, etc. Getting Life Insurance is based on you or your spouse or both being Insurable. For actual figures for this strategy, you will need to speak with an Insurance professional.
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