Perhaps you’ve heard that a life insurance policy can be used as a retirement planning tool. You’ve also heard that annuities are commonly used in retirement planning. This may have you wondering – what’s the difference?
The Basics
Annuities are financial products that produce a reliable income stream. Many people don’t have enough money saved for retirement, and longer lifespans mean that people need even more money to retire comfortably. Annuities are one possible solution.
Life insurance is designed to pay a benefit upon the insured’s death. However, permanent life insurance is also a helpful retirement tool. It builds a cash value that the owner can tap into for any reason.
The Advantages of an Annuity
Annuities are an insurance product that can offer many advantages for the right investor. Here are some of the main reasons people decide to go with an annuity:
- Annuities can create a stable income stream during retirement. This can help people maintain a good standard of living during retirement, even if they enjoy very long lives.
- Annuities have a tax-deferred status. This means you don’t pay taxes while your investment grows.
- Annuities have no annual contribution limit, so you can invest as much as you want in order to catch up to your retirement goals.
- Annuities can be fixed, variable or a combination of both. Variable annuities pay out better or worse depending on how the investments do, which is great is you want to take a chance on a bigger payout. Fixed annuities pay a pre-determined amount, which is great if you want to be guaranteed a set amount. If you want the both of best worlds, you can pick an indexed annuity, which combines both models.
The Advantages of a Life Insurance Policy
Permanent life insurance policies also offer numerous advantages for the right investor.
- The death benefit can protect the insured’s family. This is the advantage normally associated with life insurance, and although the product offers much more than this, it’s still an important point.
- Permanent life insurance policies gain cash value. The policyholder can tap into this value for any reason. Policyholders can also pay more than the cost of insurance to increase this value.
- Life insurance benefits and withdrawals can be tax free when criteria are met.
- Your life insurance policy is generally protected from lawsuits. Depending on the state, it may also be safe from creditors.
- Just as with annuities, permanent life insurance comes in different varieties, including variable and indexed.
Which Is Right for You?
When it comes to retirement planning, there is no one-size-fits-all solution. Annuities and life insurance both offer attractive advantages, but every financial planning product has its pros and cons. To determine which is best for you, schedule a financial planning appointment.