A new LIMRA Secure Retirement Institute (LIMRA SRI) study of annuity owners finds the top two reasons consumers buy annuities are to supplement Social Security/pension income and to receive guaranteed income payments for life.
“Our research consistently shows consumers are worried about running out of money in retirement – 67 percent of pre-retirees list having enough money throughout retirement as their top financial goal,” noted Jafor Iqbal, assistant vice president, LIMRA SRI. “Annuities are fundamentally unique investment products, offering some combination of guarantees – guaranteed income that investors cannot outlive, protection of principal from market volatility, or guaranteed death benefits for beneficiaries. As more Americans face retirement without the benefit of a pension and growing longevity risk, an annuity can provide peace of mind.” This leads to the question, what are the differences between annuities and life insurance?
Annuities in Retirement
As you may already know, annuities are financial contracts that pay a steady stream of income for either a fixed period of time or for the lifetime of the annuity owner. Because they can guarantee a stream of income for life, annuities protect annuity owners against the possibility of outliving their financial resources.
Cause for Concern
One-third of U.S. homeowners, between the ages of 30 and 59, will not be able to maintain their standard of living after retirement, even if they delay their retirement until age 70, according to a 2012 study by the Employee Benefit Research Institute.
Additionally, over 3.9 million elderly Americans in 2012 was living below the federal poverty line, according to the U.S. Department of Health and Human Services. Furthermore, 56 percent of American retirees still had outstanding debts when they retired in 2012, according to a survey by CESI Debt Solutions.
Life Insurance vs. Annuity
Some consumers may question whether an annuity or life insurance policy would better suit their financial portfolio and match their long term financial goals.
While both have features that resemble each other, their purpose is very different. Life insurance provides money when you die to pay for any remaining bills, cover the cost of the funeral, give money to loved ones or for any other financial obligation or desire you wish to fulfill even in death. Annuities provide tax-deferred savings for retirement.
However, for those who want to protect their family after death as well supplement their retirement income may be able to achieve the same outcome using another investment strategy.
Indexed Universal Life Insurance
One financial tool you may use to supplement your retirement and add to your financial portfolio is an indexed universal life (IUL) policy. An IUL provides death benefit protection potentially income tax-free to the beneficiaries. In addition, the strategy can be a cash accumulation vehicle that grows tax deferred and may be used to supplement retirement.
In an IUL, when premiums are paid, a portion pays for the insurance coverage and any fees involved while the rest is added to the cash value. The total amount of cash value is credited with interest over the duration of the policy.
This deferred growth of cash value may help alleviate the higher capital gains and income tax consequences. Policy owners can generally access their policy’s available cash surrender value for supplemental retirement income, cash emergencies, or other financial needs income tax-free, as long as the policy is properly structured.
The tax-free income from loans and withdrawals may provide the policy owner with a cost-effective method to supplement their retirement income.
These plans need to be structured properly in order to receive tax benefits. It is best to consult with a financial professional to help you decide which type of plan suits your unique situation.