Life Insurance or Annuity: What’s the Difference?
Many have heard of life insurance and some may even be familiar with a life insurance policy’s cash value and living benefit. But what most people don’t know is that a life insurance company may also offer another product called annuity. While life insurance insures a person’s life to provide protection for their loved ones, annuity provides steady income for retirement. These two products of life insurance company offer protection for different life concerns.
Life insurance addresses the concern, what if you die too soon, by providing the insured (the person whose life expectancy and health are used to determine the rating and premium payment) a death benefit. This death benefit is paid out to the beneficiary upon the insured’s death. Life insurance provides people the reassurance that their family will be taken cared of after they pass on. Life insurance can also help with estate planning. In addition to a death benefit, permanent life policies also have a cash value that clients can choose to take out a loan from. Life insurance can be purchased for all ages (varies across carriers), however, premium amount varies depending on your age, gender, rate class, and face amount. Generally, the younger and healthier you are, the cheaper your premium.
While life insurance eases the worry of dying too soon by providing income for your loved ones after your passing, annuity addresses the opposite concern… what if you live too long? Once retired, people run the risk of outliving their income. According to the Organization for Economic Co-operation and Development’s 2017 data, the average man’s life expectancy in the US is 76.1 years and an average of 81.1 years for women [1]. When you consider that people are living longer due to the advancement of technology and improvement in overall quality of life, a person outliving their retirement income becomes a more likely possibility for more people than you think.
With annuity, the annuitant (the person whose life expectancy is used to calculate annuity payments) is provided the security of income during a specified period of time or their lifetime as a supplement to any other retirement funds they may have. Unlike life insurance, your health does not determine the costs, rather it depends on the amount of money you can put in. It should be noted that an annuity may be better suited for those closer to or are already retired, especially, if you plan to take out money in the near future. Annuity products, like an IRA and 401K, requires you to wait till after age 59 ½ years to avoid a 10% IRS penalty tax. In addition, annuities may have a surrender period, where you must wait for a period of time (varies between carriers) before you can take out money. Otherwise, you’re assessed a fee for taking money prematurely.
The type of product that is right for you depends on your life goals and immediate needs. If you want to ensure your family and loved ones are taken cared of, then life insurance would be a better choice for you. If you want steady income to supplement your other retirement fund, then an annuity may suit you better. However, people differ from each other in how they want to lay out the foundation for their life, their family, their estates, and more. Different needs and concerns have different solutions. Which is why it is important to consult your financial advisor or tax accountant first to see whether an investment is suitable for you.
Life insurance carriers offer different life insurance and annuity products to cater to the different needs of their client. Many also offer different riders that you can add on to your policy. If you want to learn more about life insurance or annuity products, please contact Transglobal to speak with one of our sales supports for assistance.
888-831-8868
[1] Source: simplyinsurance.com
