Life Insurance Annuity: What Happens When It Matures?

Life insurance and annuities are both insurance products, but they differ in how they pay out. Life insurance is primarily used to pay your beneficiaries when you pass away, while an annuity grows your savings and pays you an income while you're still alive. However, some life insurance policies let you build savings during your lifetime, and annuities can include a death benefit payment. Annuities are typically used for retirement income purposes and can help individuals address the risk of outliving their savings.

Annuities are a type of insurance contract

How Annuities Work

Annuities are contracts issued and distributed by insurance companies and purchased by individuals. The insurance company agrees to make regular payments to the annuity owner, either immediately or in the future, in exchange for premiums paid by the purchaser. These payments can be structured as a fixed or variable income stream. The accumulation phase is when the annuity is being funded, and the annuitization or payout phase begins once payments to the annuity owner commence.

Types of Annuities

Annuities can be categorized as immediate or deferred, and fixed, variable, or indexed. Immediate annuities provide payouts immediately upon deposit of a lump sum, while deferred annuities are designed to grow on a tax-deferred basis, with payouts beginning at a future date specified by the annuitant. Fixed annuities offer a guaranteed minimum interest rate and fixed periodic payments, while variable annuities fluctuate based on the performance of underlying investments. Indexed annuities are fixed annuities that provide returns based on the performance of an equity index.

Annuity Benefits

Annuities are particularly beneficial for individuals who want a stable and guaranteed income during retirement. They address the risk of outliving one's savings and provide peace of mind by ensuring a steady cash flow. Annuities can also be structured to continue payments to a spouse or beneficiary after the annuitant's death, offering financial security for loved ones.

Considerations and Criticisms

While annuities offer guaranteed income, they also have certain drawbacks. Annuities are illiquid, meaning the invested cash is locked up and subject to withdrawal penalties. This lack of liquidity makes it challenging for individuals with financial needs or those seeking more flexible investment options. Additionally, annuities can be complex and costly, with various fees, charges, and potential penalties involved. It is crucial to thoroughly understand the terms and conditions before purchasing an annuity contract.

Annuities vs. Life Insurance

Annuities differ from life insurance in their purpose and payout structure. Life insurance provides a lump-sum payment to beneficiaries upon the insured's death, addressing mortality risk. In contrast, annuities provide a guaranteed income stream during the annuitant's lifetime, addressing longevity risk. While life insurance deals with the risk of dying prematurely, annuities focus on the risk of outliving one's assets.

Annuities are not the same as life insurance

Annuities and life insurance are distinct financial products with different purposes, benefits, and payouts. While both are insurance products, they serve different needs and operate differently. Here's why annuities are not the same as life insurance:

Purpose and Benefits:

Life insurance is primarily designed to provide financial protection for your loved ones in the event of your death. It ensures your beneficiaries receive a cash payout, which they can use to maintain their standard of living, pay off debts, or fund their education. On the other hand, annuities are meant to protect you from outliving your assets. They provide a pension-like stream of income during your retirement, ensuring you have a guaranteed income for life. This helps you manage the risk of running out of money in your later years.

Payouts:

Life insurance typically pays out a lump sum death benefit to your beneficiaries when you pass away. In contrast, annuities usually pay benefits in monthly instalments over time. With life insurance, your beneficiaries receive the full benefit amount, whereas with annuities, the payout is based on the contract terms and your remaining balance.

Beneficiaries:

With life insurance, your beneficiaries are typically your spouse, children, or designated heirs. They receive the death benefit after your passing. In contrast, with an annuity, you and, in some cases, your spouse, are the primary beneficiaries. This means you receive the income payments directly.

Underwriting and Acceptance:

Life insurance usually requires a health assessment and underwriting process. Your acceptance and premiums are often based on factors like age and health. Annuities, on the other hand, do not require health underwriting, and you are generally guaranteed to qualify as long as you have the funds to purchase the contract. However, there may be age restrictions on the benefits and income amounts, which can be dependent on your age, gender, and other factors.

Timing of Purchase:

Life insurance is often purchased earlier in life, especially when the death benefit protection is crucial for your loved ones. In contrast, annuities are typically bought later in life as a way to supplement retirement income.

Funding:

Life insurance is usually funded through regular monthly or annual premiums paid over time. In contrast, annuities are generally funded through one or more lump-sum payments, either upfront or periodically.

While both life insurance and annuities have their advantages and can be used together as part of a comprehensive financial plan, they serve distinct purposes and cater to different needs. Life insurance focuses on protecting your loved ones after your death, while annuities focus on providing you with a steady income during your retirement years.

Annuities are used primarily for retirement income

Annuities are contracts issued and distributed by insurance companies and bought by individuals. The insurance company pays a fixed or variable income stream to the purchaser. People invest in annuities by making monthly premium payments or lump-sum payments. The holding institution then issues a stream of payments for a specified period or for the remainder of the annuitant's life.

Annuities are designed to provide a steady cash flow for people during their retirement years, alleviating the fear of outliving their assets. However, these assets may not be enough to sustain their standard of living, so some investors may turn to an insurance company or other financial institution to purchase an annuity contract.

Annuities are appropriate for investors, known as annuitants, who want stable, guaranteed retirement income. Annuities are also suitable for individuals who have received a large lump sum of money, such as a settlement or lottery winnings, and prefer to exchange that money for future cash flows.

Annuities have different phases: the accumulation phase, when the annuity is being funded and before payouts begin, and the annuitization or payout phase, which starts after payments to the investor commence.

Annuities can be immediate or deferred. Immediate annuities are often purchased by individuals who have received a large sum of money and want to exchange it for future cash flows. Deferred annuities are structured to grow on a tax-deferred basis, providing guaranteed income that begins on a specified date.

Annuities can be a beneficial part of a retirement plan, but they are complex financial vehicles. Many employers don't offer them as part of an employee's retirement portfolio due to their complexity. However, the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019 has loosened the rules, giving employers more flexibility in selecting annuity providers and including annuity options within 401(k) or 403(b) investment plans.

Annuities are financial products that offer a guaranteed income stream

Annuities are designed to address the risk of outliving one's savings. They provide a guaranteed income stream, with the option of a fixed or variable rate, for a specified period or for the remainder of the annuitant's life. The income payments from an annuity can be set up to continue for a fixed period, such as 20 years, or for the rest of the annuitant's life. This makes annuities a form of insurance against the risk of living too long and running out of money.

Annuities are typically funded through a lump-sum payment or periodic payments. During the accumulation phase, the annuity is funded and grows on a tax-deferred basis. Once the annuitant reaches the payout phase, they begin receiving income payments from the annuity.

Annuities can be structured in different ways, such as immediate or deferred, fixed or variable, and indexed. Immediate annuities provide payouts immediately upon deposit of a lump sum, while deferred annuities are designed to grow on a tax-deferred basis and provide income at a specified future date. Fixed annuities offer a guaranteed minimum interest rate and fixed periodic payments, while variable annuities provide the potential for larger or smaller payments depending on the performance of the annuity fund's investments. Indexed annuities are fixed annuities that provide returns based on the performance of an equity index.

Annuities offer a guaranteed income stream, ensuring that annuitants cannot outlive their income and providing stability in retirement. However, it is important to note that annuities are complex financial products with potential tax implications and withdrawal penalties. As such, it is recommended to consult a financial professional before purchasing an annuity to ensure a clear understanding of how it works and the associated costs and risks.

Annuities are usually bought by retirees

Annuities are financial products that offer a guaranteed income stream and are usually bought by retirees. They are a type of insurance contract designed to turn your money into future income payments. You can buy an annuity with either a lump sum payment or through multiple payments over time.

Annuities are often used to supplement retirement income. They are a form of insurance against living too long and running out of money. They can be set up to provide income over a fixed period or to guarantee income for the rest of your life.

Annuities can be immediate or deferred. Immediate annuities are often purchased by individuals who have received a large lump sum of money, such as a settlement or lottery winnings, and want to exchange this for future income. Deferred annuities, on the other hand, are structured to grow on a tax-deferred basis and provide guaranteed income at a future date specified by the annuitant.

Annuities can also be fixed, variable, or indexed. Fixed annuities provide a guaranteed minimum interest rate and fixed periodic payments, while variable annuities offer the potential for larger or smaller payments depending on the performance of the investments held in the annuity fund. Indexed annuities are fixed annuities that provide returns based on the performance of an equity index.

When purchasing an annuity, it is important to consider the different types and their implications, as well as any associated fees and charges.

Frequently asked questions