Learn about how annuities vs life insurance products differ. Some life insurance policies provide cash value for policyholders. Learn more.
Getting closer to retirement age brings about many considerations, one of the most prominent being how to have financial security throughout post-retirement years. As people research ways to stay financially stable in retirement, they might consider life insurance and annuities. These products contain key distinctions that can affect an individual's financial future.
Knowing the differences is important because retirement savings are a major concern for many. According to Northwestern Mutual's 2019 Planning & Progress Study, 22% of Americans have less than $5,000 in savings for retirement.1 Only 16% have saved $200,000 or more. For those planning to live at least 10 years past retirement age, those numbers are bleak. It's understandable to search for ways to ensure financial stability now, like life insurance and annuities.
If you want a comfortable life for you and your family now and after retirement, you may be wondering about the type of compensation annuities vs life insurance provides. In this article, learn about the difference between life insurance and annuity products and how to make your financial future the most secure it can be.
- Life insurance and annuities allow you to invest on a tax-deferred basis.
- Life insurance pays your loved ones after you die. Annuities take payments upfront then can give you a lifelong income stream.
- Both products may have fees involved.
What Is an Annuity?
An annuity is a contract with an insurer to guarantee future income. The individual promises to pay a insurance company a certain amount of money, either in installments or in a lump sum now. The company promises to pay the individual a series of cash deposits in the future.
For many people, annuities are a solid investment, thanks to their lack of annual contribution limits, their relative stability and safety when compared to other investments such as stocks, and lack of probate fees to beneficiaries.
There can risks with annuities though, such as up-front commission fees and higher surrender fee penalties if you prematurely withdraw funds from your contract.
What Is Life Insurance?
For many people, life insurance with cash value may be a better fit for their retirement plans. With permanent life insurance plans like whole life insurance or universal life insurance, the policy holder receives life insurance coverage until their death, plus other benefits.
Permanent life insurance policies are sometimes called "cash value life insurance" policies. As you pay permanent life insurance premiums, you also build cash value. This cash source is tax-deferred. While you're alive, you can borrow against the cash value for a typically low interest rate.
With whole life insurance, your cash account will be credited based on the performance of conservative investment portfolios. With variable universal life insurance, policyholders can choose to invest in a basket of money market, stock and bond funds to increase a policy's growth potential.
Which Is Right for You?
To make any financial decision, you'll need to take into account your unique current situation and what your future needs will be. With annuities, you pay money now to get access to payments later, giving you a sense of security in your long-term financial health.
With life insurance policies like permanent life insurance, you can access the cash value you've built without having to wait up to a decade. The other major benefit of life insurance is that death benefits are paid out to beneficiaries after you pass on.
For those who choose the cash value life insurance route, as long as you pay your premiums in full, on time, you'll build up cash value. You can withdraw cash value to cover retirement needs, or you can take out a loan on the cash value and pay it back with interest.
For those who choose an annuity, as long as you take the fees into consideration, you'll find security in regular payments that can help supplement your retirement income, especially as the need for medicine and nursing care increases. And like life insurance policies, they offer death benefits to your beneficiaries. There are also several types of annuities, giving you options on which can be best for you and your family.
If you're considering life insurance for a secure financial future, contact AIG Direct online or at 800-294-4544 for more information.