Posts Tagged ‘life insurance policy’

Life & Annuities Explained

Life Insurance and Annuities have a few similarities but the objectives of the two products are the exact opposite. A life insurance policy is to insurance that if you die prematurely that your lost income will be replaced for your dependents and heirs. An annuity is a contract with an insurance company that guarantees that you will not out live your retirement income. In other words, one is to insure your income if you die too soon, the other is to insure your income if you live too long.

Who Should Buy Life Insurance?

Many people wonder if they even need life insurance. If you are single with no dependents, why should you worry about life insurance? Well if before you die you become very ill and need 24 hour care maybe in a hospital, you will rack up some hefty medical expenses. Will you parents or you siblings want to be strapped with these bills? Probably not.

What about funeral expenses? Who will be strapped with those? If you have credit card debt or any other kind of debt, you may want to consider covering that with life insurance. So even if you are single, you need to have some life insurance to cover the mess you will leave.

If you are married and have a family it goes without question that you need life insurance. If you die prematurely your family will still have rent or a mortgage and bills to pay. You may also leave a mess that needs to be cleaned up also, plus incur funeral expenses.

So, to answer the question of who should buy life insurance, everyone should have some life insurance benefits. It is just to help with extra expenses that a death can cause a family and in some instances it is to replace your financial contribution to the welfare of your family. If you are a stay at home mother, you need life insurance also. If you die prematurely, your family will have additional expenses for child care and other help.

Who Should Buy an Annuity?

Annuities are typically purchased by people who are beginning to think about retirement. You don’t have to be ready to retire soon in order to consider an annuity, but most annuity buyers have pretty finished raising their children and have some extra money set aside for a rainy day.

Many annuity buyers will be in their late 40’s or early 50’s. They are not ready just yet to retire but are beginning to focus on this phase of their lives a bit more. If you have done all the pre-tax saving you can do with IRAs and 401K contributions, you may want to start looking at other ways to tax-defer investment income. An annuity is a good want to add to your retirement nest egg.

You can contribute after tax dollars but any returns you make will be tax deferred until you start to take withdrawals from the annuity. You can use an annuity for 401K rollovers into IRA accounts if you want to start adding guaranteed living benefits to your retirement vehicles.

The annuities available in today’s marketplace are especially designed to give you living guarantees. Years ago people looked at annuities as a way to tax-defer investment returns and then annuitize the contract at retirement so that they had a life long income. The living benefits on some of the newer annuity contracts give fabulous benefits beyond tax deferral and annuitization. In fact, most annuities are not annuitized anymore. The contract owners can take lifetime income from them while still maintaining control of the money in them.

For more information, see Annuities Explained.

What are the Differences between Life Insurance and Annuity Contracts?

The obvious differences between a life insurance contract and an annuity contract is that one provides a death benefit as the primary benefit, and the other provides an investment vehicle that will provide a future income to the owner. Many people confuse these two vehicles. It is important to distinguish the differences though.

If you primary concern right now is to make sure you have enough retirement income that you cannot out live, then an annuity is the vehicle to use to fill this need. There is a secondary benefit of a death benefit to your dependents and heirs, but that is only a secondary benefit. You need to use the right product to meet your primary needs first.

If your primary concern is to replace your lost income to your family in the event of your premature death then you need to purchase life insurance. This is the most cost effective way to fulfill this need. If you live a long life there are long term benefits in the way of cash value accumulation that you can eventually use as a source of retirement income.

This is however, a secondary benefit of a life insurance policy. You should use life insurance only to fulfill your primary need of replacing your income to your family and if you are lucky enough not to need it for this purpose you can take advantage of the secondary benefit.

Conclusion

In conclusion, when trying to decide whether you are better off buying a life insurance policy that builds great cash value or buying an annuity that has a death benefit, you should stop to consider your primary objective. As mentioned earlier, every person needs some life insurance just to clean up their debts and expenses from a premature death. Some people need life insurance to replace their current income for dependents. After you have these things and probably quite a few other things covered, then you can start thinking about annuities for retirement income.

Both of these contracts are good ideas for most people at some point during there life, just determine what you most immediate needs are and use the correct product for that need. Life insurance insures the replacement of your income to your to those who survive you and an annuity insures your income if you live too long.