Life insurance policies and 澳洲幸运5官方开奖结果体彩网:annuities are types of insurance ꧙co𒈔ntracts between insurers and policyholders, but they serve fundamentally different purposes.

People generally purchase life insurance policies because they want to leave a 澳洲幸运5官方开奖结果体彩网:death benefit to their heirs. On the other hand, pre-retirees may buy annuities because they want a source of 澳洲幸运5官方开奖结果体彩网:guaranteed income in retirement.

That said, there is an overlap between the two products🎐. For example, there are annuities that provide death benefits and life insurance policies that offer living benefits.

Here's a breakdown of key differences, similarities, and when each might make sense.

What Is an Annuity?

Annuities are a type of insurance product where policyholders either pay a lump sum of money to get a payout immediately or make regular premiums to receive a payout after a certain period of time. They're typically used for 澳洲幸运5官方开奖结果体彩网:retirement planning and may be a good option for risk-averse investors who want to minimize 澳洲幸运5官方开奖结果体彩网:longevity risk.

Like other insurance products, annuities are complex and can vary greatly, so it's important to read the fine print to understand the various rules, the rate of return, and any fees, which can eat into your returns.

There are various types of annuities:

• 澳洲幸运5官方开奖结果体彩网:Fixed annuities offer a guaranteed interest rate, which may be periodically adjusted.
• 澳洲幸运5官方开奖结果体彩网:Variable annuities invest in assets like stocks or 澳洲幸运5官方开奖结果体彩网:mutual funds. They offer the potential for higher returns but also more risk—including the possibility of losing money.

Variable annuities may offer a feature coꦅmmonly associated with life insurance: a death benefit.

If an annuity holder dies early and only receives a small portion of the money they paid in, a death benefit can help them ensure their 澳洲幸运5官方开奖结果体彩网:beneficiaries inherit some of the leftover money. The death benefit may be the remaining value of the account or a predetermined amount.

Some annuities also offer riders—which are add-on features for insurance policies that cost extra. Riders can be used to add a death benefit to a policy or increase the death benefit.

Life Insurance

Life insurance policies are designed to provide a death benefit to a policyholder's designated beneficiaries when they die. There are many different kinds of life insurance, but policies generally fall into two camps: permanent or term life.

• 澳洲幸运5官方开奖结果体彩网:Term life insurance policies offer coverage for a period of time, typically between 10 and 30 years. If a policyholder dies while they're covered, their beneficiaries will receive the death benefit. However, their beneficiaries won't receive anything if their policy expires before they die.
• 澳洲幸运5官方开奖结果体彩网:Permanent life insurance offers lifelong coverage but at a much higher cost. With permanent life insurance policies, as long as a policyholder keeps up with premiums and the policy is in force, their beneficiaries will receive a death benefit.

These policies offer a feature known as 澳洲幸运5官方开奖结果体彩网:cash value, which is a savings component that policyholders can withdraw from, borrow from, or even use to pay premiums. Like annuities, permanent life insurance policies (t💞hat incl💜ude cash value) can offer varying rates of return.

For example, a 澳洲幸运5官方开奖结果体彩网:whole life insurance policy is a type of permanent life insurance that offers a guaranteed, fixed interest rate. But 澳洲幸运5官方开奖结果体彩网:variable life insurance, another kind of permanent life insurance, offers policyholders the option of investing their cash value in different investments via sub-accounts.

And like annuities, life insurance policies offer riders, some of which include living benefits, which you can take advantage of while you're alive. Cash value may also be considered a living benefit because you can use it while you're alive.

Annuities vs. Life Insurance

Although annuities and life insurance have some ♊similarities, they serve different purposes.

Annuities are best for those who want an additional source of income in retirem𒊎ent, while life insurance is a superior option if you want to leave behind money to beneficiaries.

Life insurance may also be harder for people to qualify for, as traditional life insurance policies require 澳洲幸运5官方开奖结果体彩网:medical underwriting. This means that applicants will have to undergo a medical exam and complete a questionnaire regarding their medical history and health status.

Taxes

Annuities offer tax-deferred growth while life insurance payouts ar🅘e tax-free 💟for beneficiaries.

With annuities, there are different tax rules depending on if you purchased the annuity in a retirement account—like a traditional IRA or a Roth—or not. When you buy an annuity in a retirement account with pretax dollars, it's known as a qualified annuity.

With 澳洲幸运5官方开奖结果体彩网:qualified annuities, the rules of the IRA also apply to the annuities. This means that if you purchase an annuity in a traditional IRA, you don't pay taxes on your initial contributions, the annuity grows tax-deferred, and you pay ordinary 澳洲幸运5官方开奖结果体彩网:income tax on the entire distribution in retirement. In contrast, with a Roth IRA, since you pay taxes on the upfront contribution🌌s, you don't have to pay taxes when you take distributions.

However, suppose you purchase an annuity outside of a retirement account, or a nonqualified annuity. In that case, the annuity grows tax-deferred, and you only pay income tax on your earnings when you pull the money out. This is because you're purchasing the money with already taxed dollars.

When it comes to understanding the taxation of life insurance policies, the rules are a bit simpler. When beneficiaries receive life insurance payouts, they're not subject to any taxes, but there are a few exceptions.

Additionally, if you have a permanent life insurance policy with cash value that you borrow from, 澳洲幸运5官方开奖结果体彩网:those loans may be taxable depending on whether the loan is greater or less than the value of premiums you've paid on the policy. So if you've taken out a loan that's more than the value of the premiums you've paid, you'll owe taxes.

Liquidity

Annuities are known for their illiquidity, and you shouldn't put money in one unless you're confident you won't need it in the near future. This is because many annuities have 澳洲幸运5官方开奖结果体彩网:surrender periods, lasting a few years.

During the surrender period, there are penalties, known as surrender charges, for withdrawing money. These 澳洲幸运5官方开奖结果体彩网:surrender charges typically decline over the surrender period until they cease once the surrender period ends.

In contrast, some life insurance policies, like permanent life insurance policies, which have cash value, do offer liquidity, as you can tap your cash value while you're alive. However, term life insurance policies offer no such 澳洲幸运5官方开奖结果体彩网:liquidity.

The Bottom Line

Annuities and life insurance may seem similar at first glance, but they solve very different problems. Annuities are designed to provide income while you're alive while life insurance is meant to provide money to your loved ones once you're gone.

Still, there can be some shared traits, as annuities can offer death benefits, and life insurance may have living benefits. To know which product is right for you, consider whether you need steady income in retirement or want financial protection for your loved ones.