Differences Between Annuities and Life Insurance

Simply put, life insurance protects against dying too soon, while annuities provide against living too long.

[Preface: As insurance and financial planning professionals, we are required and mandated by Hawaii state law to go through 20 hours of continuing education every two years. The following information comes directly from my study materials provided by WebCE and TestSmart. May it give you a better understanding of the key differences between annuities and life insurance.]

First off, the third party involved in a life insurance contract is the insured, whereas, the third party in an annuity contract is the annuitant. If the insured is rated because of health problems, then the cost of buying the death benefit increases. Hence, the rating has a negative effect. However, if the annuitant is rated because of health problems, the amount of payout on the annuity value may be increased, or, the amount of payout needed for an immediate payout will require a lesser amount to be deposited into the annuity contract. Hence, the rating has a positive effect.

The Internal Revenue Service (IRS) considers all annuities to be retirement plans. As a result, they are subject to the early withdrawal penalties on monies taken before age 59½. If a life insurance contract is not a modified endowment contract (MEC), then contract owners have no early withdrawal restrictions. Unless an annuity is old enough to have been grandfathered, most annuities are taxed on the gain as soon as monies are taken. This is not the case with a non-MEC life insurance policy.

Lastly, life insurance is used mainly for risk management, whereas annuities are used for asset accumulation. Life insurance creates an estate when paid at the death of the insured. Annuities, on the other hand, liquidate an estate over time by providing a stated stream of income on the assets involved.

For more specific information on annuities, and to see how The Wheeler Group can help you better plan for a more secure retirement, please call us at (808) 216-4147 or email: gage@successhawaii.com

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