An annuity allows investors to place a certain amount of money in an tax-deferred account in exchange for income in the future. Life insurance provides a benefit to your survivors when you die. Although both investment options provide benefits, differences exist between the two types of contracts. To effectively plan for the financial future of yourself and your family, you should understand how annuities and life insurance policies work.
An annuity represents a contract with a life insurance company. At retirement, you can receive a lump sum amount or fixed payments. You can invest in a fixed or variable annuity. Investing in a fixed annuity guarantees that you will receive your principal and interest in the future. A variable annuity does not include a guarantee. The value of a variable annuity depends upon its underlying assets. Variable annuities invest in securities that can possibly pay higher returns than fixed annuities.
Life insurance is also a contract you enter into with a life insurance company, but the focus is to provide a death benefit to your beneficiaries once you die. According to Fidelity Investments, death benefits are typically tax free. Several types of life insurance policies are available, including term, whole life and universal life insurance. Term life insurance provides protection for a specific time period, such as 20 years. Whole life provides permanent protection as long as premiums are paid, and includes a savings component. Universal life provides permanent protection and allows you to increase and decrease your premiums and coverage throughout your life.
Annuities are beneficial to individuals who desire guaranteed income for life. The rate of return on annuities is typically higher than certificates of deposit or government securities. Tax advantages are another benefit that makes annuities attractive to some individuals. You can benefit from life insurance if you have specific goals that you want to reach even after your death. For example, you family can use the death benefit to send your children to college or pay estate taxes.
Individuals who need additional income sources during retirement invest in annuities. An annuity also makes sense if you are looking for a retirement account without contribution limits. Unlike some other retirement accounts, you are not required to take a minimum distribution at retirement age. Life insurance is needed by individuals who pay for the majority of their family expenses. Life insurance provides your family the ability to pay for your funeral expenses and maintain their standard of living. For example, your family can continue to make mortgage payments and pay household expenses with the benefit amount.
- Hemera Technologies/AbleStock.com/Getty Images