So how does an annuity differ from life insurance? Annuities are issued by life insurance companies, but annuities and life insurance strategies each have their own unique benefits and limitations. Is one better than the other?
As with all financial product questions, there are no perfect answers...only bad sales pitches. Let’s take a closer look at both annuities and life insurance so you can fully understand how they might fit in your current financial plan.
Annuities are built to provide benefits while you are alive. Therefore, whether it’s guaranteed income, principal protection, interest rate CD type growth, long term care/confinement care, or mutual fund type growth with a tax deferred Variable Annuity, the type of annuity you choose will dictate the contractual goal that you are solving for.
Most fixed annuities like Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders attached to a deferred annuity are all structured to provide a lifetime income stream or a specific period of time.
As a matter of fact, annuities were introduced in the Roman Times to provide a lifetime pension type income stream to the dutiful Roman soldiers and their families. Lifetime income is still is the only financial product that guarantees payments regardless of how long you live, and still the primary reason people buy annuities. It’s a monopoly that the annuity category owns.
As I always tell people, life insurance is the best ROI (Return on Investment) you will never see. You will never see it because you will be dead! Life insurance provides a tax-free death benefit that passes lump sum and probate free to the listed beneficiaries on the policy. It’s the best legacy product on the planet because life insurance financially protects your family when you’re dead, or as I like to say, when your Learjet hits the mountain.
When you buy a life insurance policy...you should buy the highest death benefit with the least amount of money…in my opinion. It should be that simple, but there are many life insurance products available with many unneeded whistles, bells, high fees, and non-guaranteed sales promises. The most efficient and simple and that’s the most pro-consumer type of life insurance available is called “term life insurance.”
Life insurance protects your family when you are gone. For most of us, that is a primary goal and financial box we all want to check off our list.
Most life insurance products involve going through the underwriting process. That means getting blood tests, submitting your medical records, etc. In most cases, it’s a long drawn out process but worth the effort in the end for that tax-free death benefit. A very small portion of the marketplace is guaranteed issue life insurance, but there are restrictions on the amount of death benefit you can acquire. If you can physically qualify for underwritten life insurance, I would encourage you to choose that path.
Mostly all annuities are guaranteed issue, which means that no underwriting is required. If you are alive and your cognitive functions are in order, you will be issued your choice of annuity. However, that doesn’t mean you need to buy one.
Death and taxes. Annuities and Life Insurance. With annuities you must pay taxes on any death benefit. Life Insurance death benefits pass lump sum and tax-free to your heirs. Both annuities and life insurance pass outside of probate, and both are considered contractual legal tender.
For now, our friends at the IRS are good with the tax-free nature of life insurance death benefits. That’s a good thing, and my advice to you is to take advantage of that legacy gift. I will guarantee that your family will thank you for life insurance being part of your overall financial plan.
I’m pretty sure my wife and 2 daughters will love the life insurance I have in place when I pass away.
Corn, wheat, grains, precious metals, electricity, oil, beef, orange juice, and natural gas are all commodities. Annuities and Life Insurance are also commodity products and should be shopped with all carriers to find the highest contractual guarantee for your specific situation.
It’s important to find a life insurance calculator or annuity calculator that objectively shops all carriers for the best price.
Whether you choose life insurance for the ultimate legacy gift or an annuity type to solve for a specific goal, both are transfer of risk strategies. As part of your overall retirement plan, you would be transferring risk to the life insurance/annuity carrier. As we all get older, transferring risk becomes more attractive and makes financial sense as we transition to the next chapter of our lives.
Transferring risk might make sense for you and your family, depending on your specific financial situation of course. If so, annuities and life insurance strategies can contractually accomplish that goal for you.