Understanding your financial objectives well before you reach retirement age makes it easier to meet your goals once you’re closer to retirement. One key point: understanding the difference between life insurance and an annuity. Here’s what you should know.
How life insurance works
Life insurance provides valuable financial protection for those that mean the most to you. A life insurance policy provides your beneficiaries with a cash payout when you pass away. Your loved ones can use the money as they see fit to provide for their needs, including maintaining their standard of living, paying off the mortgage or funding education. In general, you pay a monthly premium for life insurance (the amount you pay varies on a number of factors, including the type of life insurance you own).
How annuities work
An annuity is an insurance contract you purchase that guarantees you’ll receive a specified amount of money every month for the rest of your life. Annuities were created to help protect people as they age by generating a consistent income stream they can rely on throughout their lifetime. People generally invest a lump sum and in return receive a monthly amount.
One way to think about an annuity is that it provides the opposite type of protection as life insurance. Life insurance provides protection for loved ones when you die; annuities provide a guaranteed lifetime income for yourself, which means you won’t outlive your assets or money.
Life insurance details to know
Life insurance policies provide different options to choose from when it comes to policy design and coverage length. Each policy type meets different needs. For example, term policies provide valuable protection for a fixed number of years (such as during child-raising years). Permanent policies provide lifelong coverage and cash value benefits. Permanent life insurance may also offer the ability to make withdrawals or borrow against the cash value.
Annuities details to know
As with life insurance policies, there are different types of annuities. Some are designed to begin providing a payout immediately. If you don’t need the income right away, a deferred annuity can be purchased with a lump sum or periodic payments, and you can choose a time in the future to start receiving payments (for example, when you retire). In addition, it’s important to understand your payout options. For example, how will you choose to receive the income stream from your annuity?
The annuities vs. life insurance bottom line
Many people choose to meet a variety of goals by purchasing both an annuity and a life insurance policy. As you start to consider the details of your financial plan, identify your goals, understand the difference between life insurance and an annuity and consider how each might work to benefit you and your loved ones.