Annuities vs. Life Insurance – Insurance 101


Annuities vs. Life Insurance

Today’s most common method of financially planning for retirement is by investing in a 401(k) or IRA. However, many of your clients may feel it is impossible to save enough money for a comfortable retirement by investing in only a 401(k) or IRA account.

IRAs and 401(k)s have contribution limits that restrict the total amount that can be invested in them each year. While IRAs and 401(k)s are excellent savings tools, they shouldn’t be your clients sole means of saving for retirement.

Annuities are another beneficial instrument to help them reach your long-term financial goals. Understanding how annuities work will boost your clients confidence in purchasing them. A great way to explain annuities is to compare them to life insurance, a topic many people already understand. Below is an overview of some of the most common features of life insurance and annuities.

Life Insurance: An Investment for Others

Life insurance is a way to for your client to take care of loved ones after they die. Generally with life insurance, your client will purchase a set dollar amount, typically a large sum such as $100,000 or $1,000,000. They pay a monthly premium to the insurance company for as long as they live. In return, when they die, the insurance company pays the beneficiary the amount of the policy – the $100,000 or $1,000,000 they initially agreed on when they bought the policy.

With whole life insurance, your client can usually borrow against the amount of money they’ve paid into the policy (not the policy’s face value) at a low interest rate. They either pay the money back or agree to reduce the policy’s face value when it pays out at their death. An option may also be to surrender the entire policy for the full amount of premiums they’ve paid at any time, but the interest will be taxed.

Annuities: An Investment for Your Client 

Annuities are an investment tool that takes care of your client while they are living. Generally, annuities are created to earn interest while providing your client with a steady stream of income. They may opt to take a lump sum from their annuity when they retire, but most people choose to receive payments instead. Annuities provide confidence and relief by knowing they will receive income on a monthly basis throughout their retirement.

Annuities work more like savings accounts in that your client gets back the amount they’ve paid in, plus interest. They can either outright purchasean annuity all at once or elect to contribute monthly installments.

An immediate annuity begins to make payments to your client soon after purchasing it. Deferred annuities make payments at a later date, such as when they retire. For both types, the payments can last for a predetermined period such as ten years or for the rest of their life after retirement. You cannot borrow money from an annuity.

Fixed Annuities vs. Variable Annuities

Whether an annuity is fixed or variable refers to the rate of return received from where your clients money is invested. Many fixed annuities invest in bonds and promise a minimum guaranteed rate of return.  This option guarantees principal protection and a ROI.

Variable annuities are more risky. They can buy into different stocks, bonds, money markets or mutual funds, and the investments can be moved around. Of course, the rate of return changes, too, depending on where a variable annuity is invested.  Your client does not have principal protection in this contract.

The Taxing Situation

Life insurance policies and annuities are both tools to invest money on a tax-deferred basis. Life insurance funds are distributed tax-free to your beneficiary when your client dies.

For annuities, income tax is charged on the interest portion of the payments, if using non qualified funds. Annuities are designed for retirement, and withdrawals made before age 59 ½ are charged with income tax and a 10% penalty on the interest, wether qualified or non qualified funds are used.

Annuity Advantages

Annuities work a lot like IRAs and 401(k)s, but they do have a major benefit over them. You are limited to investing a few thousand dollars a year in IRAs and 401(k)s. Annuities have no limits on the dollar amount you can contribute each year. The sky’s the limit, and they are a great vehicle for retirement savings.

Annuities provide a welcome haven for more of your clients money to grow without the burden of taxes. For many people, annuities relieve the stress of saving for retirement as they enjoy the security of knowing they’ll have a reliable source of income to keep them comfortable in their golden years.


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