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Annuities and life insurance are often presented as an either/or choice. They both offer death benefits, but together, these insurance products provide coverage throughout your entire life.
Life insurance protects your family if you die during your working years, and an annuity provides post-retirement income. In the most basic terms, life insurance covers costs if you die too soon, and annuities make sure you don’t run out of money if you live a long time.
Compare the following benefits and drawbacks of investing in an annuity or life insurance policy:
Feature | Annuity | Life insurance |
---|---|---|
Death benefit | ![]() | ![]() |
Tax-deferred growth | ![]() | ![]() |
Riders available | ![]() | ![]() |
Penalties for early withdrawal | ![]() | ![]() |
Interest | ![]() | ![]() |
Loans against earnings | ![]() | ![]() |
Fees | ![]() | ![]() |
Income payments while alive | ![]() | |
Taxable benefits | ![]() |
An annuity is a type of tax-deferred savings account set up with an insurance company. You pay into your account with either a lump sum or with payments over time, and your insurance company invests your money. Once your account matures, you can withdraw your earnings as income for your retirement.
If you die before your annuity payments are complete, whatever is left in your annuity account becomes a death benefit paid to your beneficiaries.
Once you start paying into your annuity, your annuity grows based on the interest rate set by your insurer and the type of annuity you choose. Once you’re ready to receive payouts, you’ll get your money based on the payment option you choose when you purchase your policy.
Each type of annuity determines how your money grows over time.
Your payout options are set at the purchase of your policy and determine how you’ll receive your money.
Life insurance provides financial help to your family when you die. As long as you pay your premiums on time, your insurance company will pay a lump sum benefit to your beneficiaries after you die. With some policies, you may also earn interest that can be used as collateral for a loan while you’re alive.
Life insurance will either pay out to your beneficiaries if you die during a set term, like 20 years, or whenever you die if you have a permanent policy. There are two main types of life insurance to choose from:
Because annuities and life insurance provide coverage for different stages of your life, many people invest in both to bolster their long-term investment portfolios. But if you need to choose between the two, keep the following in mind:
Both life insurance and an annuity provide security and tax-deferred growth with relatively low risk. So, choosing between these policies or deciding to invest in both depends on your retirement goals and financial priorities. But before you apply for either, make sure to compare your life insurance and annuity options to make sure you’re getting the best possible coverage for your money.
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