WTFinance: annuities vs. life insurance

If you’re looking to secure your family’s financial future, you may be considering a life insurance policy or an annuity. But you may have lingering questions about which option to choose – and what makes them different in the first place.

In this article, we’ll explain how annuities and life insurance differ, and leave you with some handy tips to help you choose the right option for your specific situation.

What is an annuity?

An annuity is a type of contract between a policyholder and an insurance company. There are several types of annuities, but all aim to provide monthly income while the annuitant is still alive. The cost of the annuity depends on the type and provider.

One of the disadvantages of annuities is that they often charge fees, which can add significantly to the cost. It can also be difficult to get rid of and you may have to pay high redemption fees if you want to dissolve the annuity.

Customers often purchase annuities because they want the security of a guaranteed payment. Traditional stock market investing does not offer any sort of guarantee, which may seem risky to consumers.

Unlike life insurance, an annuity is paid only as long as the owner is still alive. If you die, the pension will end. Consumers concerned about outliving their retirement savings can purchase an annuity with guaranteed payments.

“If you expect your costs to stay stable and don’t want to worry about stock ups and downs, annuities can give you peace of mind,” said Noah Damsky, CFA of Marina Wealth Advisors.

What is life insurance?

A life insurance policy will provide a death benefit to your heirs if you die while the policy is active. If there are people in your life who depend on your income, life insurance can help them survive financially after you’re gone. Most people buy life insurance if they have a spouse or child who needs their income.

Some employers offer life insurance policies as benefits, but you can also purchase life insurance from a third-party company.

Types of life insurance

There are three main types of life insurance: term, whole and universal. Understanding how different policies work is key to choosing the best solution for you and your family.

Term life insurance

Term life insurance is granted for a fixed period, usually between 10 and 30 years. During this term, you will make equal monthly payments to the insurance company. If you die during the term, your heirs will receive full payment.

The monthly premium for term life insurance depends on your age, gender, health, and other factors. The older you are, the more you will pay.

According to insurance broker PolicyGenius, the average monthly premium for a 35-year-old male is $30.14 per month for a $500,000 policy over 20 years. The average monthly premium for a 35-year-old woman is $25.43 for a $500,000 policy over 20 years.

Whole life insurance

Whole life insurance is designed to protect you for your entire life. Your beneficiaries will be eligible for payment as long as you continue to pay monthly premiums.

Because whole life policies are meant to last your lifetime, premiums are much more expensive than term life policies. According to PolicyGenius, a whole life policy for a 35-year-old male with a $500,000 policy would cost $571 per month. That’s about 19 times more expensive than a term life insurance policy.

Many financial experts argue that whole life insurance policies are unnecessary because most people don’t need insurance to last their lifetime. Once you stop working, your family may no longer depend on your income and may not need coverage if you die.

universal life

Like whole life insurance, a universal life insurance policy will last your lifetime. However, universal life can also come with a cash value that you can borrow or withdraw during your lifetime. You can also use cash value to make your monthly premium payments, but this is usually only available after you’ve made several years of payments.

The cash value is invested in the stock market, but the amount earned is limited by the insurance company. Monthly premiums for universal life insurance policies are similar to whole life premiums.

How to choose between an annuity and life insurance

Before choosing between an annuity and life insurance, you need to determine what you are really looking for among these products. Is it money for your family in case you die during your best earning years? Is it a nest egg to use during your golden years?

Determining your motivation is key to choosing the most appropriate product. If you want to invest for your retirement, a 401(k) or Individual Retirement Account (IRA) may be more suitable than an annuity or life insurance.

Using insurance or annuities as investments is rarely a good idea. Annuities and life insurance almost always have limits on how much you can earn in a single year, which can hurt your nest egg.

“In most cases, it would be better to use investments for investing and insurance for insurance,” said financial planner Jay Zigmont of childless wealth.

If you want to protect your family financially in the event of your death, a term life insurance policy may be the best option due to lower premiums than a comprehensive or universal policy, leaving you with more money to use. for other things, like investing.

As always, you should consult a financial professional when making these types of decisions.