Do You Think of Annuities as Life Insurance?
Posted on July 2, 2014
Ever wonder if Annuities are the same thing as life insurance? I have heard this question at times and today I want to answer that for you.
Annuities are issued from life insurance companies….so in essence they are life insurance products. However, annuities and life insurance are very different when it comes to taxes.
Before we go further I want to make sure to say that when it comes to taxes or any questions around that subject you should always consult with a qualified CPA or tax lawyer. Annuity agents are not tax advisors.
Now that I said that part, let’s go into the similarities and differences between annuities and life insurance.
The main difference between annuities and life insurance is that the death benefit from life insurance passes tax free to beneficiaries you have listed on the policy.
Annuities do not offer that same tax benefit. Annuity death benefits do not pass to your beneficiaries tax free, and are included as part of your estate from a taxation standpoint.
The other primary difference is that when it comes to life insurance policies you most likely will have to go through an underwriting process that involves medical testing and review of your medical history. Not everyone qualifies for life insurance.
A majority of annuities require no underwriting and are what’s considered “guaranteed issue.” Pretty much anyone can buy an annuity.
As for how money can grow inside of a life insurance policy and an annuity, both share similar accumulation strategies. Each can offer fixed rates, index options, and variable/mutual fund type growth choices, in addition to providing liquidity provisions if needed.
If your primary goal is the best guaranteed death benefit, then life insurance is probably the direction you want to go. If you need lifetime income, then an annuity would be the best choice.
Both annuities and life insurance are primarily based and priced on your life expectancy. With annuities you can liken it to placing a bet with the insurance company about how long you are going to live (that you are going to live longer than the insurance company thinks you are going to live). With life insurance, you are making a bet with an insurance company that you will not live as long as their mortality tables predict.
With both options you are transferring a significant risk (the unknown life expectancy you have) to an insurance company instead of shouldering that risk on your own.
Both annuities and life insurance strategies work well when they are properly placed to contractually achieve your goals. Remember you always want to do your research and buy the contractual realities, not something that was pushed on you or that seems too good to be true.
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