Many investors approaching or in retirement age invest their non-registered funds in bonds, GICs, treasury bills, savings accounts and other low-risk investments. While these investments ensure safety of principal, their after-tax returns are generally quite low.

There is one often-overlooked alternative that can allow you to increase your after-tax return without eroding the capital available to your estate. This investment is called an "Insured Annuity" or "Back-to-Back" Strategy.

Here's how it works

An Insured Annuity simply involves buying a prescribed annuity plus term insurance. The best way to understand this strategy is through a couple of client examples.

Client #1: Norman is 70 years old and has $200,000 invested in GICs paying 5% interest, which provides him with $10,000 of income annually.

Norman has other income sources and his marginal tax rate is 46%. Norman will pay tax of $4,600 annually on his GIC income, and will be left with $5,400 each year as disposable income.

Norman would like to leave the $200,000 to his children, so he likes the GICs because he can use the interest guaranteed without ever touching the $200,000 capital.

It's true that Norman's investment in GICs will successfully preserve his $200,000 capital, but the interest income is highly taxed and so he's left with very little each year.

Client #2: Lily is also 70 years of age and has $200,000 that is invested in GICs, providing the same $5,400 after-taxes that Norman receives. Lily used the "Insured Annuity" Strategy. She bought a prescribed life annuity with the $200,000 she had sitting in GICs. The annuity will pay her $24,982 a year. Since only a portion of each annuity payment is taxable, the tax on the annuity will be just $4,154 each year. With annuities, each annuity payment is made up of interest income plus a return of capital, and the capital is returned tax-free. The interest portion attracts some tax - but much less than she was paying with the GICs. After taxes, Lily is left with $20,828 ($24,982 minus $4,154) which is much higher than the $5,400 she received annually with the GICs.

So what's the drawback?

Each time Lily receives an annuity payment, she's getting back some of her original $200,000 capital, so that she won't be able to leave her children the $200,000 that she could have with the GICs. In fact, aside from buying an annuity with a guaranteed payment period, there's no way to leave any of that $200,000 to her kids, since the insurance company will keep whatever's left of her capital on her death. That's what people don't like about annuities.

But here is Lily's solution. With the extra cash she's receiving, Lily can buy a term-to-100 life insurance policy that will pay her children $200,000 when she dies. The cost of the policy is $6,562 each year. So follow the numbers here. Lily takes the $20,828 she has been receiving after taxes, pays her insurance premium of $6,582, and is still left with $14,266 in her pocket each year. This $14,266 is a full $8,866 more than the $5,400 of after-tax income she used to receive on her GICs! (See chart below.)

Now you'll understand why this strategy is called an Insured Annuity or "Back-to-Back". The idea involves buying both a life annuity and an insurance policy back-to-back.

The Insured Annuity works best with those aged 65-85, either on a single or joint life basis. Older ages for an Insured Annuity produce even more dramatic returns. But, as with all life insurance related programs, you must pass a health review in order to qualify.

Insured Annuities also work well in corporate situations where money is held in an active or inactive holding/investment company. This strategy could potentially help someone withdraw money out of their corporation tax free and remove the capital gains taxes payable on death.

By investing just a portion of your capital in an Insured Annuity, you will have significantly improved your financial health by reducing taxes and producing a higher, guaranteed cash flow.

Please call me if you would like to see a personal illustration on how the Insured Annuity may help your situation.