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If you’ve never ventured into the world of life and annuity insurance, well, today is your day to explore this new avenue. There are many differences between life and annuity insurance. So, what are the specific distinctions of each type?
What is an annuity?
An annuity is an investment opportunity to grow and manage your money. An insurance company offers individuals a contract to convert their money into future income payments. This annuity purchase involves either a lump sum amount or many payments over a long period. How much your money grows depends on the type of annuity. After a designated time passes that allows your investment to build up, you can begin receiving payments from the insurance company.
What is a life policy?
A life policy is different. Throughout a policyholder’s life, he or she will make premium payments to an insurance company to protect family members from the unexpected passing of the policyholder. The protection arrives in a death benefit that the insurance company pays out if and when the policyholder does pass away. The insurance company calculates the death benefit and amount of premium payments with the policyholder before the policyholder submits the first premium payment. Usually, the death benefit is significant enough to provide for the family’s current and future needs.
Are my annuity profits taxable?
How do you know if your annuity will produce taxable profits or non-taxed growth? When you input taxed money into an annuity, such as a lump sum from your retirement, the annuity is non-qualified, and your growing funds are non-taxable. When you transfer non-taxed money into an annuity, such as from a 401k or IRA, the annuity is qualified, and your increasing dollars are taxable.
What are the main types of annuities?
Annuities can either be a fixed or variable annuity. Fixed annuities offer the buyer less risk because their funds are not subject to the wavering world economy. The downside of this annuity resides in the promise of minimal gain on your investment. Business experts recommend a variable annuity for the more savvy investor. Variable annuities can garner significant dividends via a portfolio of mutual funds selected by the policyholder, but the buyers also expose their money to more stock market risk.
Among the fixed and variable annuities lies another feature. The buyers must designate whether they want a deferred or immediate annuity. As the name suggests, deferred annuities delay payments to the policyholder and allow the invested money to grow. This strategy translates to larger payouts for the patient investor. Immediate annuities begin payments to the buyer right away. Typically, this annuity is the option for those surrendering a lump sum to the insurance company.
What are the different types of life policies?
The five main types of life policies include term, whole, universal, variable, and final expense life insurance. Individuals buy a term life policy to last for a predetermined time or term. Often, the term agreed upon is 5, 10, 15, 20, 25, or 30 years. It depends on how long a buyer believes his or her family will remain financially dependent on him or her. Term life insurance is generally less expensive than permanent life insurance (whole and universal). If the insured person passes away during the term, the insurance company pays the beneficiary or beneficiaries a death benefit. Once the term is up, the insurance protection ends. There is no payout or cash value accumulated.
Permanent life insurance offers a buyer protection for the rest of their life. This type of coverage also accumulates a tax-deferred cash value. Whole and universal life insurance are the most common types of permanent life insurance. Whole life grows your money at a steady guaranteed rate, while universal life insurance exposes your money to an ever-changing stock market with its ebbs and flows. Universal allows for greater rewards than whole life insurance but holds more significant risks. The variable universal life insurance policyholders may invest their growing money in mutual funds or other financial opportunities.
The last type of life insurance is final expense insurance. This insurance is for older individuals who no longer have dependents and want to guarantee their future funeral and burial arrangements are secure and paid in advance. Typically, those 50 and older can easily qualify for this coverage with no medical exam or underwriting required. Final expense can also prevent financial burdens from weighing heavy on grieving family members. The guaranteed death benefit can also cover medical bills, credit card debt, or other money owed.
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Life Insurance Questions?
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