Is An Annuity Considered Life Insurance?
Question: Is an annuity considered life insurance? Do they work the same? from Ted in Miami, FL
Answer: Most people don’t know this, Ted, but annuities are actually issued from life insurance companies….so in essence they are life insurance products. However, annuities and life insurance are vastly different when it comes to how they are taxed.
As a side note, when it comes to anything involving taxes, you should always consult with a qualified CPA or tax lawyer. Annuity agents are not tax advisors, and should not fill that role in any manner. Now that we got that behind us, let’s talk about the similarities and differences between annuities and life insurance.
The main difference between the two is that the death benefit from life insurance passes tax free to your beneficiaries listed on the policy. I always tell people that life insurance is the best return on investment that you will never see. Get it?….you’re dead! Annuities do not offer that same tax benefit. Annuity death benefits do not pass to your beneficiaries tax free, and are included as part of your estate from a taxation standpoint. If you remember one thing, remember that life insurance has tax free death benefits and annuities do not.
The other primary difference is that in order to own the vast majority of life insurance products, you have to go through an underwriting process that involves medical testing and the review of your medical history. Not everyone can qualify for life insurance.
The overwhelming majority of annuities require no underwriting and are what’s considered “guaranteed issue.” That means that no underwriting is involved, and pretty much anyone can buy an annuity. There is such an annuity animal called a “Rated Single Premium Immediate Annuity” that requires underwriting and carrier approval to receive a higher payout, but this is a very tiny part of the annuity market. I just wanted to mention this one weird annuity exception so the AnnuityMan® haters/fact checkers can remain seated.
As for how money can grow inside of a life insurance policy and an annuity, they both can share similar accumulation strategies. Each can offer fixed rates, index options, and variable/mutual fund type growth choices, in addition to providing liquidity provisions if needed.
The bottom line is that if your primary goal is the best guaranteed death benefit, then life insurance is probably the direction you want to go. If you need lifetime income, then an annuity would be the logical choice.
I always tell people that the reason insurance companies have the big buildings is because they know when we all are going to die. I’m serious! Both annuities and life insurance are primarily based and priced on your life expectancy. With annuities, you are essentially making a bet with an insurance company that you are going to live longer than the insurance company thinks you are going to live (per their mortality tables). With life insurance, you are making a bet with an insurance company that you will not live as long as their mortality tables predict. With both, you are transferring a significant risk (the big unknown of exactly how long you will live) to an insurance company instead of shouldering that risk on your own.
Both annuities and life insurance strategies work when they are properly placed to contractually achieve your goals. Remember to always buy the contractual realities, not some too good to be true sales pitch dream.
Originally published by annuity123.com 9.12.13 – http://blog.annuity123.com/is-an-annuity-considered-life-insurance/