Of course it is!  Often quoted pension actuary, Malcolm Hamilton, finds in the Nov 27, 2009 Retirement Savings Research Program that for a 65 year old opposite-sex couple:

• at least one will live to approximately age 90;
• approximately 10% of couples will have one partner that lives 8 years beyond the normal life expectancy;
• approximately 1% of couples will have one survivor who lives 14 years beyond the normal life expectancy.  That’s impressive!

What does this mean to you?

Couples entering retirement at age 65 can expect to have at least one partner still receiving income at age 90.  That’s 25 years of income that needs to be provided by all sources.  This could be from the Canada Pension Plan, Old Age Security, RRSP/RRIF income, private pensions and other investment assets.

In partnership with Investor Education Fund, The Globe & Mail features a series of questions and answers, the most recent entitled Is an Annuity Good For Me? With the low interest rate environment, we get this question quite often, and depending on the purpose and structure of the annuity, our answers vary.

One strategy that has remained popular in spite of lower interest rates is the “Insured Annuity” or “Back to Back Annuity” financial planning strategy.  The goal of an ordinary annuity in general is to provide a specific amount of guaranteed income, for a set amount of time.  This time frame could be 5 years, 15 years, or for the rest of your life.  What differentiates an “Insured Annuity” from an ordinary annuity is the added benefit of combining the income, with the purchase of a permanent life insurance contract that replenishes your estate with the initial investment value.

Let’s look at an example:

Assume you have an investment portfolio with GICs or other interest-bearing investments, and you use the interest payments as income.  Since we’re looking at long term investments, a 12.5 year GIC today would pay 4.00%, and would be 100% taxable as income.  If this income is subject to the highest Marginal Tax Rate of 46.41% in Ontario, you would be left with only 2.14% in your pocket.  In other terms, $10,000 of annual income would leave you with only $5,359 to spend.

The “Insured Annuity” strategy requires you to liquidate a portion of these fixed income investments and purchase a life annuity.  The income provided will be used to fund your lifestyle, while also funding a life insurance policy to replace the original investment as mentioned above.  This may sound counter-intuitive; however because an annuity payment is a combination of interest, and a return of your own capital, your taxable income is lower, providing you a higher income for life.

You name a beneficiary to receive the life insurance proceeds after death.  When you die, your beneficiary receives the insurance proceeds tax-free.

The Numbers:

What do you think about annuities now?