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What’s The Difference Between Annuities And Life Insurance Policies?

Monday, January 4, 2021

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Understanding the role of life insurance in financial planning and preparing for the future is complicated. When protecting your loved ones in the event of your death, you have several options for providing for their financial stability. Many confuse life insurance and annuities when, in fact, they are two significantly different financial planning tools.

What Is A Life Insurance Annuity?

An annuity is an investment tool to safeguard against outliving your assets, but is an annuity the same as life insurance? In general, life insurance policies protect your loved ones. Usually, those are known as term or whole life insurance. An annuity is an insurance method to support you in your retirement years. More importantly, annuities are tax-deferred savings. IRAs and 401-k savings strategies have an annual maximum contribution limit; annuities can offer an additional tool in your investment portfolio. Annuities do not historically give high returns for your investment but tend to be steady and reliable. The fees for this type of money management can be relatively high, so it is wise to discuss the options with both your insurance agent and financial planner. 

What Do Life Insurance And Annuities Share In Common?

When planning for the future, both life insurance and annuities are financial planning tools. Both are tax-deferred and can build wealth over the long term. Another common feature is higher fees and slow growth. Where stocks and bonds may build rapid wealth, life insurance and annuities are steady and predictable. Remember, life insurance is for your loved ones if you die young; an annuity is to safeguard outliving your assets. Both protect you and your loved ones through very different scenarios.

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What Makes Life Insurance and Annuities Different?

In general, life insurance will pay out a lump sum to your beneficiaries. Annuities will pay a set amount to you until your death. Term and whole life insurance are tax-free upon payout, which means that your loved ones will receive a lump sum with no tax burdens should you die. There are two types of annuities: deferred and immediate. An immediate annuity holds a higher risk with a potentially higher payout. The deferred annuity is a guaranteed fixed payout with lower investment risks. Both of these are tax-deferred until the payout begins.

Life insurance is typically purchased when you are young, annuities when you are older and have more cash to invest. The Insurance Information Institute offers this helpful chart for a quick snapshot of best use for both of these financial planning tools.

Independent Insurance Associates is here to help you plan your financial future wisely. Understanding the appropriate type of life insurance through the growth stages of your economic life is our job. Contact us today to discuss your best tactics in planning for your loved ones’ care and support. Additionally, we are happy to explain annuities’ strategic use for wealth building into your retirement years.  No matter where you are in your financial life, we can help ease the burdens of planning for your best care and well-being.