Fixed Rate Term Life Insurance – At first glance, life insurance and annuities may seem like opposites. Life insurance is primarily used to pay your heirs when you pass away. An annuity increases your savings and pays you income while you’re still alive. However, some life insurance policies allow you to build savings while you are alive,
And annuities can include payouts on death. Here’s how these two options compare and when each makes sense.
Fixed Rate Term Life Insurance
Annuities are a type of insurance contract designed to turn your money into future income payments. You buy an annuity with either one lump sum payment or many payments over time. You can set up the annuity with a growth period, where it builds up your savings. The return depends on the type of annuity. For example, a fixed annuity pays a guaranteed interest rate. A variable annuity allows you to invest your savings in mutual funds.
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Once you’re ready, you can start collecting income payments from the annuity. You can set up these payments over a fixed period or have them guaranteed to last for life. For this reason, annuities can be a form of insurance against living too long and running out of money.
You can set up a death benefit on an annuity contract. With this feature, the annuity will give your heir a payout based on the contract terms and your balance. For example, if you purchased an annuity for $500,000 and collected $300,000 in income payments, the annuitant’s death can pay the remaining $200,000 to your heirs.
With life insurance, you sign up for a death benefit of a certain size. If you die while covered, your heirs receive this death benefit. There are different types of life insurance. Term life insurance only provides the death benefit. It is also temporary and expires after a certain number of years.
Permanent life insurance policies can last a lifetime. Permanent policies also build cash value, money you can withdraw while you’re alive. Your cash value provides a return that can grow over time. The return depends on the type of insurance. A whole life insurance policy pays a fixed interest rate. A variable life insurance policy allows you to invest in sub-accounts, such as mutual funds, and your growth depends on how your investments perform.
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Through cash value, you can use life insurance to save for future goals such as retirement. You can then withdraw or borrow against the cash value using a policy loan.
The younger you are, the lower your premiums will be, but older people can still buy life insurance.
Most life insurance policies require you to take a medical exam and pass health insurance to qualify for a policy. If you have health problems, life insurance costs more. You may even be denied a policy altogether. For this reason, it is generally more efficient to build savings through life insurance cash value if you purchase a policy when you are younger and healthier.
Annuities do not require health insurance. You are guaranteed to be eligible. You only need to have money to buy the contract.
What Is An Annuity And What Are Its Benefits?
Life insurance is more effective in creating a legacy for your heirs. Your premiums can turn into a much larger death benefit. Your heirs also receive the life insurance’s death benefit-free. Annuity benefits in the event of death are smaller compared to life insurance. Your heirs will also owe income tax on your income from annuity investments.
Annuities provide better investment and income benefits while you are alive. Your returns are higher because you’re not also paying for life insurance coverage. Instead, all the money is used for an investment. Annuities also offer more income options, such as guaranteed income for life. Life insurance does not.
Both life insurance and annuities delay taxes on your earnings while the money remains in the contract. With life insurance, you can withdraw up to what you paid in premiums tax-free. If you withdraw your winnings, you owe income tax on them.
You can also withdraw your cash value through a loan. You do not owe income tax for insurance loans. However, the insurance company will charge interest on your outstanding loan. You can decide to never pay off the insurance loan with the plan that the death benefit will pay it off when you die. That way, you never owe income tax on the cash value.
Can I Convert My Term Life Insurance To Whole Life Insurance?
Annuity tax depends on how you bought the contract. If you purchased the annuity with pre-tax retirement funds, such as from a 401(k) or Individual Retirement Account (IRA), your future income payments will be 100% taxed as income.
If you purchased the annuity with after-tax dollars, your future income payments will be a combination of a tax-free return on the premiums and taxable gains. Your insurance company will tell you how much of each annuity payment is taxable.
Life insurance is better for early access to your money, especially if you might need the money before retirement. Once you have cash value, you can withdraw or borrow it when it suits you. There is no age requirement for when you can withdraw the money.
With an annuity, you agree to keep your money in the contract for a minimum number of years. If you make a large one-off withdrawal or cancel before the agreed date, the insurance company will charge a substantial return fee. The annuity may allow you to withdraw a specific amount without penalty, such as 10%, but not the rest.
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If you are younger than 59½ when you cancel or make a lump sum withdrawal, the IRS will also charge 10% early withdrawal and income tax on your winnings. Because of these taxes and penalties, annuities are best used as long-term retirement planning investments.
You can convert your life insurance policy into an annuity if your life insurance policy has a cash value. The annuity will then invest and generate income based on your cash value balance. You give up your life insurance in the event of death for more income and investment guarantees. However, you cannot convert an annuity into life insurance.
Annuities can have a costly surrender charge if you cancel early. The fee could potentially be 7% or more of your account balance. Annuities lock up your money for years. They can also come with significant annual fees for their investment and income guarantees. Finally, annuities based on stock market investments can be complicated and difficult to understand.
Whether annuities stop at death depends on which income option you choose. Payments stop at your death if the income is based only on your lifetime. You can also ask for a minimum number of payments, for example 20 years. If you die before age 20, the remaining payments will go to your heirs. Adding additional income guarantees will lower your monthly payment.
Term Vs Whole Life Insurance
Cash value life insurance and annuities can both help you achieve a number of goals. However, these strategies can be complex and require significant amounts of money. Consider discussing these strategies with a financial advisor before purchasing any of the financial products.
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As a type of life insurance, direct term provides the insured with coverage for a certain period of time (usually 10, 20 or 30 years) in exchange for guaranteed benefits and lower premiums. A cash payment (the death benefit) is given to your family if you die while your policy is active, so they can use it to meet short and long-term financial needs. It is one of the most affordable, flexible and simplest life insurance policies available.
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Generally speaking, term policies are already easier to understand and sign up for without complicated contracts and terms – but a direct term policy takes the same structure with a few added benefits.
Since they can be purchased online or over the phone, direct term policies have a faster application and approval process. By answering a few personal questions and getting a quote right after, it is possible to apply for and get insurance
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