Best Practices for Combining Annuities and Life Insurance for Retirement

Annuities and life insurance are both issued by life insurance companies, but they generally solve different financial problems.

Annuities are primarily used while you are alive.

Life insurance is primarily used to provide a death benefit when you die.

That distinction makes it possible for the two products to work together as part of a broader retirement and estate plan.

Key Takeaways

• Annuities and life insurance are both contractual products issued by life insurance companies.
• Annuities are generally used for living benefits such as lifetime income and principal protection.
• Life insurance is generally used to provide a death benefit.
• An annuity income stream can potentially be used to help fund life insurance premiums.
• MYGAs can provide tax-deferred accumulation with non-qualified money.
• Estate planning, tax, and trust strategies should be coordinated with qualified legal and tax professionals.

Annuities and Life Insurance Solve Different Problems

The easiest way to separate the two is by looking at their primary purpose.

Annuities generally solve for:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

Life insurance primarily solves for a death benefit.

That means annuities usually address needs during your lifetime, while life insurance is designed to provide money to beneficiaries after your death.

Using Annuity Income to Pay Life Insurance Premiums

One strategy is to use guaranteed annuity income to help pay life insurance premiums.

For example, suppose a life insurance policy costs $1,000 per month.

A Single Premium Immediate Annuity could potentially be structured to provide that $1,000 monthly payment.

The annuity income could then be directed toward the life insurance premium.

That creates one contractual benefit to support another contractual benefit.

Why Guaranteed Income Can Help

The advantage of using contractual annuity income is predictability.

Instead of depending on market gains or selling investments every month to pay the premium, the annuity provides a predetermined income stream.

That can simplify the funding strategy.

Joint-Life Income Can Add Another Layer

The annuity can also potentially be structured on a joint-life basis.

That means if one spouse dies, the surviving spouse may continue receiving the contractual income.

If the deceased spouse also had life insurance, the surviving spouse could receive the death benefit while continuing to receive the annuity income.

That structure can provide both immediate liquidity and ongoing cash flow.

Life Insurance Provides a Death Benefit

Life insurance is primarily designed to provide money to beneficiaries when the insured person dies.

Depending on the policy and circumstances, that death benefit may provide family members with:

• liquidity
• income replacement
• estate planning flexibility
• money for debts or expenses
• legacy assets

The role is different from an annuity's lifetime income guarantee.

Annuities Provide Living Benefits

Annuities are generally purchased to solve a financial problem while you are alive.

That may include:

• protecting principal
• generating guaranteed lifetime income
• creating an income floor
• accumulating money through a MYGA
• providing certain legacy or long-term care benefits

That makes annuities and life insurance complementary rather than interchangeable.

MYGAs Can Play a Role

A Multi-Year Guarantee Annuity can also be part of the strategy.

A MYGA provides a guaranteed interest rate for a specific period.

When funded with non-qualified money, the interest can grow and compound tax-deferred inside the contract.

That can provide a contractual accumulation component alongside life insurance.

Annuities and the Income Floor

One of the most important uses for annuities in retirement is building an income floor.

Your income floor may include:

• Social Security
• pension income
• annuity income
• other dependable income sources

Once that foundation is established, other assets can remain available for investment, spending, or legacy planning.

Life Insurance and Legacy

Life insurance can provide a lump-sum death benefit for beneficiaries.

Annuities can also play a legacy role, but they generally work differently.

For example, a MYGA can accumulate tax-deferred value that may eventually pass to beneficiaries.

The two products can therefore address legacy goals in different ways.

Term Life Insurance Can Be Simple

Life insurance does not necessarily have to be complicated.

One approach is to buy level term insurance and focus on obtaining the amount of death benefit needed for the lowest reasonable cost.

The objective is the contractual death benefit.

As with annuities, avoid allowing non-guaranteed growth stories to distract from the actual purpose of the policy.

What About Permanent Life Insurance?

Permanent life insurance may offer additional features.

However, if you are considering more complicated life insurance structures, make sure you understand:

• what is guaranteed
• what is projected
• the premium requirements
• the death benefit
• the cash value assumptions

The same contractual discipline used with annuities should apply to life insurance.

Irrevocable Life Insurance Trusts

Some estate plans use Irrevocable Life Insurance Trusts, commonly called ILITs.

These strategies can involve legal, estate, and tax consequences.

If an ILIT is part of the plan, coordinate with:

• an estate planning attorney
• a CPA
• a tax attorney

The annuity and life insurance pieces should fit into the legal structure properly.

Do Not Let Tax Strategy Replace the Financial Goal

Taxes matter, but the first question should still be what the products are supposed to accomplish.

Life insurance should provide the death benefit you need.

Annuities should provide the contractual living benefit you need.

Then the tax and estate structure can be built around those objectives.

Ask Two Questions About the Annuity Side

For the annuity portion, ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

Those answers help determine whether you need a SPIA, MYGA, DIA, QLAC, Income Rider, or another annuity structure.

Keep the Roles Separate

A retirement strategy becomes easier to understand when every product has a specific job.

The annuity can provide:

• income
• principal protection
• other contractual guarantees

The life insurance can provide:

• a death benefit
• family protection
• legacy liquidity

Do not force one product to do the other's job.

Where to Compare Annuity Guarantees

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

For lifetime income, compare current payouts. For guaranteed accumulation, compare MYGA rates and terms.

Any life insurance strategy should then be evaluated separately based on the death benefit and premium structure you actually need.

The Bottom Line

Annuities and life insurance can work together because they solve different problems.

An annuity can provide contractual living benefits such as lifetime income or principal protection.

Life insurance can provide a contractual death benefit for your family.

In some situations, annuity income can even be used to help fund life insurance premiums.

The key is to give each product a specific job and build the strategy around contractual guarantees rather than projections.

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