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At a time when equity markets are experiencing high volatility, the safe alternative appears to be low return, highly taxed GICs. Many seniors are now discovering how to increase their guaranteed yields by using the insured annuity strategy.

There are two components to the Insured Annuity strategy: a non-registered annuity (ie, not an RRSP or RRIF) and a life insurance policy.

· The annuity which pays the highest income is one that ceases upon the death of the annuitant with no survivor benefits. A non-registered annuity also receives favourable tax treatment.

· The life insurance is used to return the capital to the estate upon death.

In addition, if the saver has philanthropic interests, the yield can be increased even further using the charitable insured annuity where the life insurance is ultimately paid to a charity.

The following is an example of how this strategy works:

James is a 74 year old retired business owner who has accumulated assets which allows him to live a comfortable life. In an effort to preserve capital for his children, he is now investing conservatively and has more than $250,000 invested in GICs. Today a competitive 5 year GIC would pay about 2.5% per year. However, let’s assume James has a GIC that pays an exceptionally high rate of 4% per year and that he has retired at the same income tax bracket as when he was working. That means on a $250,000 GIC he receives $10,000 in interest. After paying $4,370 in income tax he is left with disposable income in the amount of $5,630.

Let’s compare this after tax income with that derived from the insured annuity strategy.

James applies for a $250,000 life insurance policy and since he is in relatively good health as an active 74 year old, in all likelihood, the policy will be issued at standard rates. He then purchases a $250,000 life annuity with no survivor benefits. The annuity pays him an annual income of $23,874. Out of this annuity payment, the life insurance premium of $13,585 is paid leaving James with a gross income of $10,289. The total amount of income tax on the annuity payment is only $849 resulting in a net income of $9,439. This is an annual pre-tax equivalent yield of 6.71% compared to 4% on the GIC.

If we further assume that James wished to make a charitable donation to the charity of his choice upon his death, he would donate the life insurance policy to that charity and the annual premiums of $13,585 paid out of the annuity income would now be available for tax relief to James, saving him $5,937 in income tax. This increases the pre-tax equivalent yield to 10.92% and the after tax cash flow to 6.15%. The result of the transaction is that James receives substantially more after tax income during his lifetime and the charity receives the $250,000 upon James’s death.

In addition, due to the fact that the proceeds on the life insurance policy flow to the charity by beneficiary designation, there will be no probate fees or administrative costs. Since the proceeds flow outside of James’s Last Will and Testament there will be no risk of Wills Variation Act Action. This is a guaranteed transaction – guaranteed income while James is alive and a guaranteed donation upon his death with no ongoing management or cost.

The Insured Annuity is a recognized strategy for mature investors who wish to increase the yield on their income producing investments. For those who also wish to benefit their favourite charity the results achieved are even more rewarding.

Example based on investment of $250,000 and tax rate of 43.7%


GIC @ 4%

Insured Annuity

Charitable Annuity*

Gross Income (annual)




Less: life insurance cost 13,585 13,585
Tax on interest/annuity




Tax saving on insurance


After-tax cash flow




Pre-tax yield




After-tax yield




* Donating life insurance to a charity


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