My Life Insurance

Life Insurance
Term Insurance
Permanent Insurance

Quotation System for Each State

Life insurance and annuities

Life policies are almost the complete opposite of annuities. We insure our lives because we worry what will happen to our families if we are not around to continue earning and look after them. Annuities deal with a different problem. As we work, we should be planning for retirement. This can be through a 401k account which is the traditional alternative to the standard retirement plan, or through building up a strong assets position. The idea is, come 60 or the age you stop earning if later, you should be in a position to continue life without financial pressure. So an annuity produces regular payments to bridge the gap between savings, investments and asset holdings. It's not always convenient to sell what you have. Once you have sold your assets, where is an income coming from if not from an annuity?

For the record, an annuity is usually a long-term insurance contract where you pay a regular premium and, when you trigger the repayment, it pays back your investment as income. It has the key advantage of being tax free. The payments into the policy are gross, i.e. tax is deferred. So long as repayment stays within the IRS rules, you recover the capital and the accumulated investment income paying tax at the standard rate. Should you die before you retire, it pays out as a conventional policy on your life.

Annuities come in several different versions. Some pay a guaranteed amount from a specified date until the time of death. Others pay only a monthly amount until the fund is exhausted. To get the best return, you should hold the annuity for as long as possible to build up the capital contribution and accumulate the investment income. The problem is that the average rate of investment return is well below what you would expect if you invested the same sum in stocks. Thus, one version of the annuity is to buy it with a single premium only when you need it. This gives you an immediate payout either for a fixed period, a fixed amount, or for the lifetime of the recipient. Depending on the contract, you can either take the benefit for yourself or nominate someone else as the beneficiary. There's considerable flexibility. But we also come back to the same truth. Annuity policies never produce the same investment returns you would get from the stock exchange.

So here's the question for those who insure their lives. Once you grow old and your children have grown up, why are you keeping your insurance policy? There was every point to insuring your life while the children were young. The benefits would have saved them from financial disaster. But now you are old, why have you not taken the cash value and bought an annuity with it? Of course, you could say the money is everything and should be your inheritance to the children. Except that would potentially mean you would live in poverty simply to keep the life insurance policy when the children are earning and living comfortably. This always was your investment building up a cash value. If you sell the policy on the secondary market, you will get a good price for it. Why not be selfish and take the value as and when you need it?

Read More Life Insurance Articles