Retirement planning involves decisions about how to fund your lifestyle after you conclude your working years, how to plan for unexpected expenses and even how to ensure that you leave something behind for loved ones and family. It can be difficult to determine which investments and products are the right choice for you with so many options to consider.
You may have heard that both life insurance and annuities are common for those entering retirement, but they may not be the right choice for your situation. Here’s what you need to know about the difference between the two and how they fit into a bigger retirement picture.
The Primary Difference Between Annuities and Life Insurance
Annuities and life insurance are both options that can provide funding to you or your family after you retire. However, the primary difference between an annuity and a life insurance policy is when it pays out. An annuity will start to pay out on a date that you choose and agree to, then it will continue to pay over time until either it reaches the end of its term or you pass away, depending on the contract you signed.
In contrast, life insurance only pays out once you have died. Its primary purpose is to provide your family with the means to cover any expenses including your funeral, outstanding debts and more. You will never see your own life insurance money.
Annuities and life insurance both provide benefits but accomplish separate goals; one is not a replacement for the other.
What an Annuity Does for You
To decide whether an annuity could be a suitable part of your overall financial picture, it is important to understand in greater detail how an annuity works. Annuities come in a variety of forms such as fixed, variable, immediate and more, terms which give some insight into how the annuity functions.
Some, such as fixed and immediate annuities, will be based on a set rate of growth that will be defined before you start the contract. This ensures that you do not lose money, even when the market begins to drop. Conversely, variable or deferred annuities might fluctuate based on the underlying index or asset on which they are based; again, this depends on what you agreed to when you signed the contract.
You can also choose when an annuity starts to pay. If you are nearing retirement and want to start receiving payments now, an immediate annuity leaves little time for waiting. If you want to fund your annuity over time and have it pay out far into the future, a deferred option could be right for you.
What Life Insurance Does for You
Life insurance, unlike an annuity, does not provide you with income. Instead, you purchase a policy of an established size, and then when you die, your beneficiaries receive that money. Life insurance is a powerful way to ensure that your family is still provided for when you pass away. The earlier you purchase life insurance, the less expensive it tends to be.
Do You Need Both?
Because life insurance and annuities do not function in the same way, it is highly beneficial to have both. However, the right combination will be determined by your specific financial needs and goals. If you have no dependents or family to whom you would leave any assets, life insurance does not serve as much of a benefit as it would for someone with children or grandchildren.
An annuity is a popular option regardless of familial situation, especially because some annuities can be set up to continue to pay in regular intervals until you die. This guaranteed stream of income helps retirees rest easy that they will always have access to a set amount of money no matter how long they live.
However, the exact terms of the annuity will have an impact on how it pays out, for how long and whether the balance can fluctuate with the market. Take some time to research the products before you select your annuity.
Choose the Right Products to Complete Your Financial Picture
Figuring out retirement spending can be a challenge, but an annuity can help to bridge the gap. At Pillar Life Insurance, we offer a self-service online portal for you to purchase the annuity and life insurance products that are right for your situation. No one knows your goals and needs as well as you do. Use our online portal to review our options to get started with planning for your future.