The Advantages and Disadvantages of Insured Annuities in a Low Interest Rate Environment

Insured annuities are as
guaranteed and unwavering
as the passage of time.

There are many investment options available to the public these days, but it can often be difficult to determine which is right for your particular situation.

An insured annuity is designed to provide a tax-efficient lifetime income and preserve or increase the money available to your estate. The annuity provides the income, while the life insurance policy it comes with preserves the capital you already have by providing a tax-free payout in the event the holder passes away. Traditionally, capital is used to buy an annuity and part of the income generated goes towards the life insurance policy.

But does an insured annuity still make sense as an investment option in a low interest rate environment? We asked two of LSM’s most decorated brokers, Mark Potter and William Shung, for their take.

“Currently, in a low-interest environment, there is limited return on investment,” says Shung. “Also, once the annuity and the life insurance are confirmed, there is limited leeway to make any change. You are locked in.”

Potter agrees, citing inflexibility as an insured annuity’s major disadvantage. “It really depends on the annuity but generally, like all investing, you are giving up risk at the expense of return,” he says. “Changes in interest rates and equity markets that would have otherwise been favourable to other investments may not help your annuity. Also, taking out lump sums to fund a new car, vacation, or your kids’ education can be problematic or unavailable.”

But in such cases where you want to guarantee your beneficiary at least something when you pass away and you’d like it to be a very stable investment, then it might be the right call for you.

“Most insured annuities provide a set monthly amount that one can rely on despite world equity markets. This can provide peace of mind for those who need a secure income,” continues Potter.

“People with cash in hand who do not want to run the risk of investing in non-guaranteed investments can choose insured annuities to protect their savings with a guarantee that after they decease, the life insurance benefit will go to their designated beneficiaries,” concludes Shung. “Depending on the size of the investment, the annuitant can retain a percentage of the annual dividend instead of using it fully for premium payment.”

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