Life Insurance Verses Annuity

Life insurance verses annuity, which is best for your financial situation? Read on to find out how life insurance and annuities work, their differences, and what they can do for you.

Life Insurance Basics

Life insurance is an agreement between you and an insurance company. In exchanged for premiums the life insurance company guarantees to pay out a death benefit upon your demise. It allows you to provide for your loved ones after death by providing them funds to replace your income, pay off debts, and cover funeral costs. There are a few different types of life insurance you can use. These include:

• Term: This type of policy will only pay out a death benefit if you die within a certain time frame. Usually 10-30 years. It is popular because it is cheaper than the other forms of life insurance.
• Whole: A whole life insurance policy covers you for your entire life. Due to a guaranteed payout, premiums are typically higher. These policies also accumulate a cash value that you can borrow or withdraw from as needed.
• Variable: Variable life insurance also provides permanent life insurance coverage. It contains a cash value component that you can invest in mutual funds. Your cash value may increase or decrease based on the performance of the funds.

Annuity Basics

An annuity is an agreement between you and an insurance company in which they promise to provide monthly payments in exchange for depositing funds with them for a set period. It can be valuable by providing supplemental retirement income. With an annuity you will receive your income payments for a set time period or until you die. Some common types of annuities include:

• Fixed: This is the safest annuity option. You are guaranteed a set rate of return on your premium. Funds will never decrease in value.
• Variable: With a variable annuity your premiums are invested. Your rate of return is based on the performance of these financial assets. This means if they do well you will get a good return. But if they perform poorly, you have the potential to lose money.

The Differences

When comparing life insurance verses annuity, it is important to understand the differences between them. First, is how you receive the money. An annuity will pay out funds to you during your lifetime. Whereas life insurance pays your family after you pass. Second, is what their policy beneficiaries are. With life insurance policy beneficiaries are either your children, partner, dependents, or a charitable organization. With an annuity you are the primary beneficiary of the policy. You may also have a death benefit provision that lets your name someone to receive the remaining payments after you pass. Third, is how you receive payment. When you have an annuity you receive your funds in the form of a monthly payment. With life insurance your beneficiaries can receive a lump sum payment or annual installments.

Fourth, is the time frame when you purchase the different products. Life insurance is usually purchased when you are younger. This is because you are healthier so insurance companies will offer more competitive rates. When you are younger you usually have people who rely on your income and life insurance can provide for them. On the other hand, annuities are usually purchased by older individuals approaching retirement age. Lastly, is the taxation of life insurance verses annuity. Life insurance is generally not taxable. Annuities grow tax-deferred, and you pay taxes when you make a withdrawal.

Why Purchase Life Insurance Verses Annuity

Life insurance and annuities both come with their own benefits. Life insurance helps your family to replace your missed income and manage debt left behind. It also helps you provide a legacy for your loved ones. Additionally, there may be a cash value that you can borrow from for medical bills, repairs to your home, or college expenses.

The advantages of annuities include the ability to help you maintain your lifestyle through supplemental income. It can help reduce retirement stress because it helps make sure you won’t outlive your savings. A fixed annuity can provide you with reduced risk and you have tax-deferred growth.

The Choice

When it comes to life insurance verses annuities, one is not better than the other, they both serve a specific purpose. Life insurance will help you provide for your loved ones when you pass. Whereas an annuity will help stabilize your finances when you retire. You need to take into consideration your financial goals, budget, and time horizon. A professional can help you weigh your choices and implement a plan.

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