When it comes to life insurance, there are a variety of different policies available. But one option that might be unfamiliar to some is the life insurance annuity.
So what is a life insurance annuity?
Simply put, it's a contract between you and an insurance company that guarantees regular payments for the rest of your life. It can be a great way to ensure you have a steady guaranteed income payments stream in retirement, and there are many different types available
Read on to learn more about life insurance annuities and how they could benefit you.
What is a life insurance annuity and how does it work?
It is a financial product that can provide you with a stream of income during retirement. It can differ from other life insurance policy types.
It is a contract between you and an insurance company, where you agree to make regular payments (either in lump sum or installments) over a period of time. In exchange, the insurer agrees to monthly payments of a fixed amount for a set period of time, or for the rest of your life.
Annuities can be an attractive option for people who are looking for a way to supplement their income during retirement by receiving a death benefit.
They can provide you with a predictable and steady stream of income that can help cover your living expenses. And, because they are backed by the financial strength of the insurance company, they can offer you a degree of security and peace of mind.
Immediate vs deferred annuities
Immediate annuities begin paying out income right away. If you are looking for a way to supplement your income during retirement, this type of life annuity may be a good option to receive a death benefit immediately.
With immediate annuities, you can start receiving payments within a few months of purchase. This can provide you with a much-needed source of income to help cover your living expenses.
Deferred annuities allow you to grow your money over time before starting to receive payments.
If you are still working and have a few years before retirement, a deferred life annuity may be a better choice. With a deferred life annuity, your money has the opportunity to grow over time, providing you with a larger sum of money to use during retirement.
Deferred annuities also offer the benefit of tax deferred basis growth. This means that you do not have to pay taxes on your earnings on a tax deferred basis until you start taking withdrawals from the life annuity.
Fixed vs variable annuities
Fixed annuities offer a guaranteed rate of return on your investment. This means that you know exactly how much income you receive in the monthly payments and this amount does not change over time.
If you are looking for a stable income stream during retirement, a fixed annuity may be a good option. The guaranteed rate of return and guaranteed income payments can offer you peace of mind, knowing that your income won't fluctuate.
Variable annuities offer the potential for higher returns of guaranteed income, but they also come with more risk. Your payments are based on the performance of the underlying investment options. This means they can go up or down, depending on how the investments perform.
If you are comfortable with taking on more risk, a variable annuity may be a good option. The potential for higher returns could provide you with a larger sum of money to use during retirement.
However, it is important to remember that the value of your investment can go down as well as up, so you could end up with less than what you started with.
Lifetime vs fixed-period annuities
Lifetime annuities provide you with a stream of guaranteed income that lasts for the rest of your life.
If you are looking for a way to ensure that you have a source of income during retirement, a lifetime annuity may be a good option. The payments from a lifetime annuity can help cover your living expenses and give you peace of mind knowing that you have a source of income for as long as you live.
Fixed-period annuities provide you with a stream of guaranteed income for a set period of time (e.g. for 20 years).
If you only need income for a specific number of years, a fixed-period annuity may be a better choice. With a fixed-period annuity, you know exactly how long the payments last. This can be helpful if you need income to cover a specific expense, such as a child's education.
How to shop for a life annuity and what to look out for when buying one
When shopping for a life annuity, it is important to compare products from different insurers to find the one that best meets your needs.
Here are some things to keep in mind when comparing products:
- Make sure you understand the terms and conditions of the annuity before purchasing it: Pay attention to the fees and charges associated with the annuity, as well as the surrender period (the length of time you must hold the annuity before you are able to cash it in).
- Consider your long-term needs and objectives: If you are close to retirement, you may want an immediate annuity that starts paying out income right away. On the other hand, if you have a few years before retirement, a deferred annuity may be a better choice.
- Compare the features of different products: Some annuities offer bonuses or perks that make them more attractive than others. Make sure you understand what each product offers so that you can choose the one that is right for you.
- Get quotes from different insurers: Annuities can vary significantly in price from one insurer to the next. It is important to get quotes from several different insurance companies before making a decision.
The pros and cons of owning a life insurance annuity
Life insurance annuities have both pros and cons. It is important to weigh the potential benefits and drawbacks before making a decision.
Pros of life insurance annuities:
- Can provide a predictable and steady stream of income during retirement
- Growth may be on a tax deferred growth
- Backed by the financial strength of the insurance company
- Can include a death benefit
Cons of life insurance annuities:
- Fees and charges can eat into your earnings
- May have a surrender period (a minimum length of time you must hold the annuity before you are able to cash it in)
- Income payments may be less than what you could earn by investing in other types of products
If you are considering purchasing one, be sure to compare products from different insurers and get quotes from several different companies to find the one that best meets your needs.
Who should consider buying a life insurance annuity?
There is no one-size-fits-all answer to this question.
Life insurance annuities can be a good choice for people who are looking for a predictable and steady stream of income during retirement and/or a death benefit. If you are close to retirement, immediate annuities may be a good choice, while if you have a few years before retirement, a deferred annuity may be a better option.
It's a good idea to talk to a financial advisor to get guidance on whether or not it is right for you.
How much money can you expect to receive from a life insurance annuity?
The amount of money you receive depends on a number of factors, including:
- the type of annuity you purchase
- your age
- the current interest rate environment
If you are considering purchasing an annuity or any life insurance policy, be sure to compare products from different insurers.
What are the fees and charges associated with life insurance annuities?
Annuities can have a number of fees and charges associated with them, including mortality charges, administrative fees, and surrender charges. Be sure to carefully review these before purchasing so that you understand what you are paying for.
Are there any risks associated with owning a life insurance annuity, and how can you avoid them?
All financial products come with some degree of risk, and annuities are no exception. The biggest risk is that the insurance company backing the annuity becomes insolvent (bankrupt), meaning the company is no longer operating because they can not pay the debts they owe. To avoid this risk, only purchase annuities from insurers with strong financial ratings (look at sites like AM Best, or read our reviews about life insurance companies).
Another risk to consider is that the interest rate environment may change, which could impact the amount of money you receive from your annuity. To mitigate this risk, consider laddering, or purchasing multiple annuities with different start dates. This way, if interest rates go down, you still have some annuities that are paying out at the higher rate.
Finally, keep in mind that annuities are not right for everyone. Be sure to carefully consider your individual circumstances before making a decision.
Now that you understand what a life annuity is and how it works, we encourage you to do more research on the different types of annuities available. Be sure to shop around and compare rates before making a purchase.
Remember, there are pros and cons to owning any life insurance policy. If you have any questions or concerns, don’t hesitate to contact us for more information or advice.