Fixed Annuities vs. Permanent Life Insurance – Which is better?
The short answer is that neither is better, both serve unique purposes in your overall investment scheme and both may be necessary. An annuity is an insurance product that pays out income and is usually used as a part of your retirement strategy. If you are looking for a steady post retirement income stream one choice is to invest your dollars in annuities.
On the other hand, if you want to provide for your family members and want them to remain financially secure without having to run for debt relief, should something happen to you, you should invest your money in an appropriate life insurance policy. Each option has a different purpose and also has its own advantages and disadvantages.
Permanent Life Insurance
When it comes to permanent life insurance, after getting a permanent life insurance quote and agreeing to the terms, you pay a premium amount that is fixed by contract for the rest of your life. The premium can be paid monthly, quarterly, annually or even in a single lump payment. The younger you are when you sign up, the lower the price you can lock in. At the beginning of your contract, a small portion of the premium that you pay is used to pay for the insurance costs, with the remainder of each premium being set aside by the company to amass cash for a fund that the insurance company hopes will cover the cost of the insurance as you get older. In the event of your death, the beneficiary of the policy will get back the face value of the policy but he won’t get the accumulated amount of money that is racked up with time. Early in the life of the policy you will have paid in much less than the amount received, but the payments will continue to grow over the life of the policy getting closer to the “face value” or amount paid out to the beneficiaries.
Fixed Annuity
On the other hand, life insurance companies sell another product called a fixed annuity, that is designed especially for people who want to a guaranteed income for their retirement. During the “Accumulation Phase” of the annuity contract, you make payments into the Fixed Annuity. And just like with the permanent life insurance you have the option to pay a fixed premium monthly, quarterly, annually or in a single lump payment. This amount will appreciate with time at a guaranteed and a fixed interest rate. When the annuity contract matures, you begin the Distribution Phase. At this point, you will begin receiving installment payments throughout a stipulated period of time. The time period can be for the rest of your life, or both yours and your spouses life. You may also choose other payout options that suits your specific needs. The advantage of an annuity is that you can’t outlive the payments. The insurance company is on the hook for the rest of your life, the disadvantage of an annuity is that should you die early you lose the remainder of your annuity payments. For this reason, the best scenario is a combination of both an annuity and permanent life insurance. This way you are covered whether you live a long or short life. Generally, it is more economical to have separate policies for the annuity and the life insurance rather than simply adding a rider to the annuity contract. Although it is more work initially, this way you can shop for the best deal on each policy. On the other hand, payouts on Life Insurance policies can be converted to a lifetime annuity payment rather than accepting a lump-sum.
Loan provisions on Fixed Annuities and Permanent Life Insurance
You may have heard about the loan provisions that the insurance companies allow you. When it comes to the permanent life insurance policies, you may borrow funds from the accumulated cash value at a relatively low rate and without the need for any collateral other than the accumulated value of the policy. It isn’t mandatory that the money be repaid but failure to do so will reduce the face amount that your beneficiary receives. So you are reducing the coverage your heirs receive by the amount of the loan plus accumulated interest thus defeating the purpose of having insurance. On the other hand, since the fixed annuities are specially designed for the people who are looking for retirement income, premature withdrawals aren’t encouraged because they will reduce the amount you have accumulated and thus reduce the monthly payout available.
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