Many people overlook or misunderstand the importance of insurance products and annuities in financial planning, especially for people who have maxed out their contributions to traditional retirement investment mediums such as 401(k) plans and IRAs. Both life insurance and annuities present specific potential benefits and drawbacks to consider. Remember this information when exploring your options for insurance products and annuities as investment tools.
Basics of Insurance Products
Life insurance is available in various forms, each with advantages and disadvantages for investment. While many view insurance primarily as a means to leave a legacy, some policies can accumulate cash value during your lifetime. If you're considering life insurance as an investment, it's essential to define your objectives and choose the policy that offers the best potential return for your money.
Types of Insurance Products
While you can purchase many different insurance policies, they all boil down to two types of life insurance.
- Term life insurance.
- Whole life insurance (sometimes called permanent life insurance).
As the name implies, term life insurance offers life insurance protection for a predetermined term or period. When the term expires, you must purchase an additional life insurance policy with different qualifications and premiums. The benefit of term life policies is that, while temporary, these policies cost considerably less than whole life insurance policies (unless you begin payments at a very young age).
Whole-life policies typically cost more upfront than term-life policies. Still, they maintain consistent premium payments for the life of the policy. A significant distinction is that whole-life policies accumulate cash value over time. As a policyholder, you can borrow against this cash value. However, if you decide to borrow, they will deduct the borrowed amount from the death benefit upon your passing.
Basics of Annuities
Annuities are contracts where you make a lump sum payment or a series of payments now to receive regular payouts in the future. They serve as valuable financial planning tools for creating future cash flow. You can choose from various annuity types depending on your cash flow objectives and requirements. For example, some annuities provide payouts for life, while others limit disbursements to a set period.
Types of Annuities
Different types of annuities cater to varied financial planning goals. Here's a breakdown of the primary annuity types to guide your decision:
- Fixed annuities: These offer a consistent interest rate, ensuring a steady income.
- Multi-year guaranteed annuities: These guarantee a specific return on your investment and provide income for a predetermined period, like ten years.
- Variable annuities: The periodic payments from these annuities depend on account performance, so that they can vary based on market conditions.
- Fixed index annuities: While these protect investors from negative market trends or declining indexes, they cap potential gains as a trade-off for that protection.
Selecting the appropriate annuity can be pivotal in securing both short-term and long-term retirement income.
Buying and Selling Insurance Products and Annuities
You must buy life insurance policies from licensed professionals. However, many websites streamline this process, allowing for easy insurance purchases in various amounts. You can buy annuities from insurance companies or brokerage firms, but always ensure you're dealing with a licensed seller.
Critical Tips for Insurance and Annuity Buyers
Annuities and life insurance can serve as practical financial planning tools. However, commissions and fees can sometimes weigh them down. Before committing, research and opt for options with minimal commissions and fees. Be wary of surrender fees, which charge you for canceling contracts or making early withdrawals. Remember, withdrawing funds from annuities before a specific age might incur capital gains taxes.
Takeaways
As with all tools for financial planning, it is wise to pay attention to the fine print when exploring your options for life insurance and annuities. Both options can help you achieve specific financial goals when used wisely.