Premium Advice — Insured annuities and philanthropic needs

At the recent CALU associate members’ meeting, Malcolm Burrows from Scotia Private Client Group’s Philanthropic Advisory Services gave a presentation on charitable giving. In it, he discussed a renewed client interest in utilizing insured annuities in a charitable sense.

Subsequently, at different meetings — within, and outside of, my own company, I again heard talk of renewed and even excited interest in insured annuities. That’s four independent sources in one week. I have no doubt that this peak in activity has much to do with the theme of some of my recent columns: volatile markets and low-interest-rate markets are the current state of affairs.

Either market condition would spur interest in insured annuities. But both at the same time create what some would call a perfect storm. Although I wrote about insured annuities last fall, it’s time to brush the dust off this concept and re-examine its applicability in both a non-charitable and a charitable sense.

Let’s again consider last fall’s couple, Frank and Maria DaVinci. Recently retired, they have amassed a decent net worth after selling their small business and investing prudently over the years. Their two children have reasonably successful careers, and although the DaVincis would like to provide some estate value to the next generation, their primary concern in today’s market is safety of investment and maximization of income. They also have an interest in giving back to their local community, which provided them the opportunity for success.

As part of their overall asset strategy, their advisor is looking at an insured annuity to represent the fixed income portion of their portfolio and to provide stability until the current market conditions settle. This involves a Term to 100 life insurance product and a prescribed life annuity to provide the cash flow to pay the premium. The excess after-tax income will provide their spendable dollars and represent an excellent return on their outlay.

Male, 70; female, 69 1,000,000 joint and survivor annuity 1,000,000 T-100 joint last to die life insurance 46% marginal tax rate

Cash flow	$75,000
Tax payable	$11,500
Insurance premium	$20,000
Net cash flow	$43,500
After-tax cash flow with alternative GIC/bond at 6%	$32,400
Increase in cash flow	$11,100
Estate benefit in both cases	$1,000,000
Increase in cash flow	25%
After-tax rate of return on capital	4.35%
Pre-tax rate of return at 46%	8.06%

The results are strong rates of return and fully guaranteed products backed by some of the largest financial institutions in the country. Plus, with a lower amount of taxable income from the cash flow, we may create potential for less of a tax burden on other forms of income and reduce potential impacts on income-tested government benefits. In addition, the estate benefit from the insurance policy may bypass estate costs of probate, executor fees, and any legal or accounting fees if we name a preferred-class beneficiary.

Last fall, I discussed the potential for these excess dollars to be used to purchase various kinds of living benefits protection to protect against increases in health maintenance costs during retirement. However, let’s assume that Frank and Maria already own this type of protection. What else could they do with their excess funds? They’ve already expressed a desire to give back to their community. The easy option for them would be simply to donate any excess cash not needed for lifestyle needs to their local charity of choice.

R elated Stories

Premium Advice — Will the TFSA kill or help insurance sales? Premium Advice — Forgotten insurance practices shine in volatile markets Premium Advice — Using product allocation to your client’s long-term advantage Premium Advice — Planned giving can help family’s future

Instead, their advisor recommends that they consider donating the death benefit from their insurance policy to their community foundation. This would create a gift of $1 million upon their passing and endow a large amount of money back to their community.

At this thought, Frank and Maria’s interest is piqued. The next question their advisor asks is whether they’d prefer to have a tax credit for their donation at death, which could help offset any applicable estate taxes, or they’d prefer to receive ongoing tax credits equal to the premium for the insurance policy. If the charity is the owner and beneficiary of the policy, the donors receive a tax credit for the premium, since the charity owns and controls the policy. If the donors own the policy and have the control and ability to change the recipient charity, no tax credit for the premium is available. In this case, a tax credit would be available once the benefit is paid to the charity.

After careful consideration, Frank and Maria decide to name the charity the owner and beneficiary, which gives them a yearly tax credit of $20,000, representing the potential for after-tax increased cash flow of more than $9,000. Since they are not concerned with increasing their estate to the children beyond what has currently been implemented and their main concern is to maximize their own cash flow, the charitable insured annuity accomplishes all of their goals and meets their social conscience needs.

Insured annuities can provide our clients refuge from interest-rate- and volatility-based income strains and offer those clients with a yearning to give back a unique opportunity to find the cash or future capital to accomplish all of their goals.

Chris Paterson is vice-president of sales, living benefits, at Manulife Financial and has over 13 years of experience marketing various insurance products.

(12/03/08)