What is an annuity life insurance policy

For individuals looking to plan for retirement, there are a variety of options. Annuities are one of them. An annuity is an insurance product that pays out regular income. It is often used as part of a retirement portfolio.

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Staying informed about how annuities and life insurance work makes it easier to come up with a financial roadmap that's tailored to your needs.

Understanding your financial objectives well before you reach retirement age makes it easier to meet your goals once you're closer to retirement. One key point: understanding the difference between life insurance and an annuity. Here's what you should know.

How life insurance works

Life insurance provides valuable financial protection for those that mean the most to you. A life insurance policy provides your beneficiaries with a cash payout when you pass away. Your loved ones can use the money as they see fit to provide for their needs, including maintaining their standard of living, paying off the mortgage or funding education. In general, you pay a monthly premium for life insurance (the amount you pay varies on a number of factors, including the type of life insurance you own).

How annuities work

An annuity is an insurance contract you purchase that guarantees you'll receive a specified amount of money every month for the rest of your life. Annuities were created to help protect people as they age by generating a consistent income stream they can rely on throughout their lifetime. People generally invest a lump sum and in return receive a monthly amount.

One way to think about an annuity is that it provides the opposite type of protection as life insurance. Life insurance provides protection for loved ones when you die; annuities provide a guaranteed lifetime income for yourself, which means you won't outlive your assets or money.

Life insurance details to know

Life insurance policies provide different options to choose from when it comes to policy design and coverage length. Each policy type meets different needs. For example, term policies provide valuable protection for a fixed number of years (such as during child-raising years). Permanent policies provide lifelong coverage and cash value benefits. Permanent life insurance may also offer the ability to make withdrawals or borrow against the cash value.

Annuities details to know

As with life insurance policies, there are different types of annuities. Some are designed to begin providing a payout immediately. If you don't need the income right away, a deferred annuity can be purchased with a lump sum or periodic payments, and you can choose a time in the future to start receiving payments (for example, when you retire). In addition, it's important to understand your payout options. For example, how will you choose to receive the income stream from your annuity?

The annuities vs. life insurance bottom line

Many people choose to meet a variety of goals by purchasing both an annuity and a life insurance policy. As you start to consider the details of your financial plan, identify your goals, understand the difference between life insurance and an annuity and consider how each might work to benefit you and your loved ones.

Get a quote for term life insurance – if you are interested in additional life products, please contact a State Farm® agent.

Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.

An annuity is a plan that helps you to get regular payment for life after making a lump sum investment. The life insurance company invests the money of the investor and pays back the returns generated from it.

1. Immediate annuity plans: There is no accumulation phase and the plan starts working right from the vesting phase. It is purchased with a lump sum and the annuity payment starts immediately either for a limited tenure or lifetime.
2. Deferred annuity: These are the pension plans in which the annuity starts after a certain date. It can be further divided into the following:
   1. Accumulation phase- It is the phase when you start investing and accumulating cash and commences from the date when you first time pay premium.
   2. Vesting phase- It is the date from which you will start getting the policy benefits in the form of pension.

These are how various annuity plans work:

1. Life annuity: You will get regular (monthly/quarterly/yearly) annuity payouts from the scheme till you are alive. The annuity stops after your death.
2. Life annuity with return of purchase price: You will continue receiving annuity payments regularly until you die. After that, the insurer returns the initial amount, which was used to purchase the annuity, to your nominee. It is a good option for those who want to leave a legacy behind.
3. Annuity payable for a guaranteed period: The annuity is to be paid for a guaranteed period, say 5, 10 or 15 years even if the annuity buyer dies. Annuity stops either on the death of the annuitant or completion of the guaranteed period, whichever is later.
4. Inflation-indexed annuity: Every year, there will be a rise in the annuity payable at a certain rate, say 2% or 5%. Though it may not be linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to some extent.
5. Joint life survivor annuity: It keeps paying till either you or your spouse is alive.
6. Joint life annuity with return of purchase price: It keeps paying till you or your spouse is alive. In the case of the death of both, the nominee is entitled to get the initial invested amount.

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