Unpacking the Protections Provided by Life Insurance and Annuities
Traditional life insurance vs life insurance annuity vs life annuity—what’s best for you? We break it down
Financial planning isn’t just about saving and investing—it’s also about protection, and that’s where life insurance and annuities come in. Traditional life insurance provides a lump sum payment to your loved ones after you’re gone, while life insurance annuities distribute the benefit through smaller, steady payments. Life annuities, on the other hand, are a different sort of product designed to provide a steady income for you during retirement.
Understanding how each option works can help you make the best decision for your financial future.
Life insurance
Traditional life insurance is designed to give your loved ones financial security if you’re no longer around. It’s an agreement between you and an insurance company in which you make monthly premium payments in exchange for a tax-free lump sum payment to your beneficiaries after your death, called a death benefit. They can use this money however they need, whether that’s covering funeral costs, paying off a mortgage or securing their financial future.
There are two main types of traditional life insurance:
Provides coverage for a set time frame, typically between 10 and 30 years.
Provides lifetime coverage as long as you keep up with your monthly premiums. Plus, some whole life policies may come with a cash value feature that grows over time, which can increase the policy’s overall value.
Life insurance annuity
A life insurance annuity works in much the same way as a traditional life insurance policy, but instead of giving your beneficiaries a lump sum payout, it provides regular fixed payments after you pass away. Your beneficiaries can receive these payments in one of two ways—either for a set period or for the rest of their lives
Provides regular payments for a specific time frame, such as 10 or 20 years. The insurer calculates the exact payment amounts so that the full benefit is paid out by the end of the term.
Provides stable payments spread over the beneficiaries’ lifetimes. Payment amounts are usually based on the age of the beneficiaries.
Life annuity
Life annuities, on the other hand, are designed to provide a reliable stream of income while you’re alive, typically during your retirement years. This extra source of income works similarly to a personal pension.
Many life annuities also include a death benefit, much like life insurance. So, if something happens to you before your annuity is fully paid out, your beneficiaries may receive any remaining value.
Key considerations
At first glance, life insurance, life insurance annuities and life annuities may seem comparable, but they serve different financial purposes. While life insurance and life insurance annuities protect your loved ones by providing financial support after you’re gone (either as a lump sum payment or through regular payments over time), a life annuity guarantees you a steady income stream while you’re alive. Plus, if your life annuity includes a death benefit and you pass away before the full payout is made, your loved ones may receive the remaining funds.
When deciding which option is right for you, take a close look at your financial goals and needs. For example, if you support your family financially and they would struggle to pay bills in your absence, a life insurance policy of either type could be a good fit. On the other hand, if you’re concerned about running out of your retirement savings, a life annuity might be a good choice to provide an extra source of income during your golden years.
It’s important to point out that life insurance and annuity terms, payout options, policy details and costs can vary significantly from insurer to insurer. Therefore, be sure to carefully review any policy before purchasing.
If you’re unsure which option is best for you, consult a financial professional who can offer insight and guidance on the policy that best fits your situation.