Why is annuity income taxed so lightly?

A prescribed annuity levels the taxable interest over your lifetime; most of each payment is a return of your own capital, so only a small portion (about $16,000 of $66,000 in the book’s example) is taxable.

What happens to the capital when I die?

With a straight life annuity — nothing; income stops and the estate receives zero. That is exactly what the insured-annuity structure fixes, restoring the capital through a life-insurance death benefit.

Should I annuitize everything?

No. The book’s rule is to insure the floor — essential expenses minus CPP/OAS/pensions — and invest the surplus. The mini-tool on this page computes the gap worth annuitizing.

GIC vs Prescribed vs Insured Annuity

Steve’s $1M three ways: income today and estate tomorrow — and why “insure the floor, invest the surplus” beats picking one number.

★ CHAPTER BRIEF

At 65 with $1,000,000, Steve’s choices are stark: a 4% GIC pays $28,000 after tax and preserves the million; a prescribed annuity pays about $61,000 — more than double — but leaves the estate nothing; an insured annuity (annuity + permanent life insurance) pays about $34,200 with the full million restored at death. Same capital, three completely different retirements.

A prescribed annuity works because each payment is mostly a return of your own capital — only a small slice is taxable interest, spread level for life. The insurance company takes longevity risk off your shoulders entirely: the income cannot run out.

The insured annuity buys back the estate: part of the annuity income funds a permanent life policy equal to the original capital. On the book’s July 2026 quotes, that combination out-earned the GIC by roughly $6,200 a year with the identical legacy — and with zero market or longevity risk. This calculator lets you swap in your own quotes and marginal rate.

★ KEY POINT

Insure the floor. Invest the surplus. Annuitize enough to cover essential expenses alongside CPP and OAS — then the growth portfolio can take real risk, because groceries never depend on it.

⚠ WARNING

Representative quotes change daily — get current ones before deciding. Prescribed (level-tax) treatment applies to personally-owned annuities only; corporately-owned annuities are taxed on accrual. Underwrite the life insurance before buying the annuity — the annuity is irreversible, your insurability is not guaranteed. Check Assuris coverage limits per institution.

Your numbers

Capital available

Your age65

Marginal tax rate30%

GIC rate4.00%

Annuity quote (defaults: the book’s July 2026 quotes — use yours)

Annual annuity income

Taxable portion of that income

Life-insurance premium (estate restoration)

Income-floor builder

Insure the floor. Invest the surplus.

Essential annual expenses

Guaranteed income already in place (CPP + OAS + pensions)

Gap to annuitize: $30,000/yr. At the current quote’s payout rate, roughly $454,545 of capital covers the floor for life.

Insured annuity income (estate restored)

$34,400+$6,400/yr vs GIC

A 4% GIC on $1,000,000 pays $28,000 after tax and leaves the full $1,000,000 to your estate. A prescribed annuity pays $61,200 — more than double — because only $16,000 of the $66,000 is taxable, but the estate gets $0. The insured annuity restores the estate: after the $26,800 premium, income is $34,400 with $1,000,000 paid at death — $6,400/yr more than the GIC with the same legacy. Insure the floor. Invest the surplus.

Estates: GIC $1,000,000 · Prescribed $0 · Insured $1,000,000.

Option	After-tax income	Estate
4% GIC	$28,000	$1,000,000
Prescribed annuity	$61,200	$0
Insured annuity	$34,400	$1,000,000

Figures as of July 2026 · Ontario basis · Educational illustration, not advice — confirm current rates with your CPA.

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Questions to ask your advisor

Ask your Advisor

Quote my exact age and capital: what prescribed annuity income, taxable portion, and insurance premium apply today?

Ask your Insurance

Can I be underwritten for the estate-restoration policy before we commit capital to the annuity?

Ask your CPA

Should the annuity be bought personally rather than corporately, given prescribed treatment is personal-only?

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From Chapter 14CPP / OAS Deferral Optimizer From Chapter 6IPP vs RRSP

Educational illustration, not advice. This tool is provided for educational purposes only and does not constitute financial, tax, legal, accounting, or insurance advice. Results are estimates, not promises — hypothetical illustrations are projections only. Figures use Ontario rates as of the date stamped above; rates and limits change. Confirm current figures and your specific situation with a CPA, tax lawyer, and licensed insurance advisor before acting.