The Charitable Insured Annuity

Rather than worrying if they will have enough capital to last them through retirement ,some retirees find themselves with more capital than they might possibly need in their lifetime. Nonetheless, they still wonder how they might safely generate more income in the meantime. A charitable insured annuity is one way to substantially boost your after tax income during your lifetime while at the same serving your philanthropic goals at death.

 

Here’s how it works: First you determine the amount of capital you might want to commit to such a strategy. Let’s say $100,000. Then you arrange to apply for a life insurance policy for an equivalent death benefit of $100,000. You will be designating your favorite charity (the McGill University Health Centre Foundation (MUHCF), perhaps?) as being the owner and irrevocable beneficiary of this insurance policy so you will need to decide who that might be. You will need the charity’s cooperation since for the insurance premiums to be tax deductible, they must be the owner and irrevocable beneficiary of this policy. 

 

Note that his strategy only works for those who are insurable which is not always a sure thing in your senior years. Certainly many are capable of passing the insurance companies’ medical exam and this is done at the insurance company’s expense. This can be a way for you to get a full medical without waiting!

 

Assuming you pass the medical and are offered the $100,000 insurance policy at standard rates (sometimes you may be still offered the insurance but at higher than standard rates and this concept may still be worth it) then the next step is to purchase a non-registered life annuity with your $100,000 of capital. The annuity will create a stream of monthly income for you, part of which will be used to pay for your life insurance premiums. Since you are using after tax dollars (not RRSP nor RRIF funds) to purchase the annuity depending on your age at purchase, most, if not all, of the income will be non-taxable. In addition, since you have designated your favorite charity as the owner and beneficiary of the policy, the insurance premiums are tax deductible thereby creating additional tax credits.

Take a look at this example: male age 75, non-smoker invests $100,000 in an annuity and purchases corresponding insurance policy for $100,000. The annuity generates $11,060 of annual cash flow (for a female of the same age, the annuity cash flow would be lower, $9992, as they are expected to live longer but the insurance costs are lower at $4867). For this male, the taxable portion of the income would only be $1352 per year which, at the highest marginal tax rate in Quebec, means $652 of taxes. From this annuity income the donor must pay $6071 of annual insurance premiums, however, since those premiums are tax deductible, he receives $3182 in charitable donation tax credits. After considering the insurance costs, taxable income and tax credits his net after tax annual income is $7519 versus the after tax income of a 4% GIC of $2071. It is like getting 14.52% from an equivalent fixed income instrument. Not too shabby. (For the female, the net after tax and insurance cost income would be $6937 or 13.40%)

 

The donor is happy with his or her after tax income while the MUHCF will be thrilled with the significant donation of the life insurance benefits later on. 

John Archer is the Chair of the MUHCF Planned Giving Committee. John Archer is an investment adviser with RBC Dominion Securities in Westmount and can be reached via e-mail at john.archer@rbc.com or by calling 514-878-5040.