Guaranteed Income for Life
By: Anne Hammond BA CIM CFP
I’d like to introduce you to Jane. Jane is a widow, 75 years of age. She has 3 children and 7 grandchildren, all of whom live nearby. She’s very involved in their lives. Jane is very aware that two of her children could really use a little extra boost financially and she wants to ensure that, upon her death, they will receive as much as possible.
Like most seniors, Jane receives Canada Pension Plan (CPP) and Old Age Security (OAS) payments. She also has a survivor’s benefit from her husband’s pension, a small RRIF, and a TFSA. In addition, Jane has about $100,000 of non-registered funds to invest.
Jane strongly dislikes having the value of her funds fluctuate with the market. In fact, she’s willing to settle for lower returns in order to avoid any fluctuations at all. Ideally, she would like to invest her funds in GICs or Canada Savings Bonds – something where she knows the principal will be guaranteed and the income will be predictable. But in today’s low interest rate environment, it’s difficult to generate the income she desires using guaranteed investments.
For example, if she were to invest $100,000 of her non-registered funds into a 5-year GIC at 2.75%, she would generate an income of $2,750 per year, comprised entirely of interest. Interest income is fully taxable, and Jane is in a 30% tax bracket. So after paying $825 in taxes, she would have $1,925 left to spend.
Assuming Jane is in standard health for her age, she could increase this income by directing her $100,000 into a life annuity with no guarantee period. (Having no guarantee period means that the annuity would end upon her death, with no further benefits to be paid). The annuity would generate approximately $8,300 per year, of which no portion would be taxable.
In conjunction with the annuity, she would also purchase a Term to 100 life insurance policy that would pay out $100,000 to her children – tax-free – upon her death. The life insurance premium would cost approximately $4,803 per year.
Thus, Jane would receive $8,300 per year from the annuity, from which she would pay $4,803 for her life insurance coverage, leaving $3,497 in her pocket to spend.
This is an increase of $1,572 per year over using a GIC! And the life insurance policy ensures that upon her death, her $100,000 principal will be passed to her children.