Differences Between Life Insurance Policies and Annuity Contracts

Introduction

At first sight, we feel that these two concepts have different goals. The main goal of life insurance policy is to offer the lump-sum cash pay-out if the policyholder left his/her life such that to make his/her earn his/her lovely family members financially convenient. Life insurance policies provide good coverage for the policyholder and his/her family members at any troublesome situation.

Then, what is an annuity? It is like a protective shield around an individual by offering lifetime guaranteed paths of income. Bond investments and traditional stock are tax-deferred alternatives for the products of the annuity. They have more significant expenses, such that would reduce investment returns.

Both life insurance policies and annuities offer tax-deferred basis to invest. There are two types of annuities. They are qualified annuities and nonqualified annuities. Qualified annuities fund with pre-tax dollars while nonqualified annuities fund with post-tax dollars.

Another thing is that both of the pensions and life insurance policies bend more towards hefty fees. As annuities, there are few types of life insurance policies too. They are simple term life insurance policy, permanent life insurance policy, whole life insurance policy, and variable life insurance policy.

Life Insurance Policies

1. Simple term life insurance policy.
   This policy offers a death benefit for the beneficiaries of the policyholder after his/her death.
2. Whole life insurance policy.
   Here the life insurance company provides loans for the policyholder according to the conservative investment portfolios.
3. Permanent life insurance policy.
   This insurance policy is known as cash-value policies too. This insurance policy has a savings component. So the premium fee may be a little bit high.
4. Variable life insurance policy.
   Products of this insurance policy increase the growth potential of this policy by allowing the policyholder to opt for a bond basket of stock and money market funds to invest. The money of the policyholder grows on a tax-deferred basis.

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Tasks of different types of life insurance policies have similarities as well as dissimilarities. And another fact that you should keep in your mind is that statements in the systems may have slight differences from company to another company as well as rates also may have some differences when compared between different life insurance companies.

Annuities

There are two types of annuity contracts as qualified annuity contracts and nonqualified annuity contracts, as mentioned above. Eligible annuity contracts consist of tax-deferred retirement plans or IRAs. These qualified annuity contracts fund with the pre-tax dollars. Withdrawal penalties and required minimum distribution surround the qualified annuity. Nonqualified annuity contracts fund with post-tax dollars.

However, annuity contracts ask the purchaser for substantial upfront commission fees and ask for surrender fees, which are comparatively higher. Another unique fact of annuity funds is that they are retained for nearly or more than ten years. There is a deferred tax basis growing for earnings. An essential point about annuity contracts is that they consider the longevity of one’s family thoroughly.

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Conclusion

Thanks for reading our first article on Life insurance, Bookmark us for more valuable article series about life insurance from us in future.

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