When comparing Annuity vs. Insurance, it is necessary to have all the information you need. It will help you in comparison for you to know what works for you.
Reasons you should keep reading – you gain awareness of the following:
- What is an Annuity?
- How does an annuity work?
- 2 Annuity Configuration types
- Three main types of annuity
- What is Insurance?
- Types of insurance
- How does insurance work?
- Annuity vs. insurance
You will be able to make better financial choices, either by a fixed income stream or protection from financial loss.
What is an Annuity?
An annuity is a product design issued by an insurance company on a contract basis. A legal agreement is reached between you and your insurance company through your investments to provide a fixed long-term income for you that you can not outlive
The type of annuity you purchase will influence your investments or payment plans and the regularity of disbursements you receive.
How does an annuity work?
Annuity contracts are customizable, meaning it is specific to your needs. An annuity was designed to provide a steady income stream but there are still a few things you need to know about how annuity works.
- Choose the annuity product that works for you.
- Choose your convertible payment plan- either by installments or lump-sum
- Choose your disbursement method- either immediate or deferred.
- Choose the duration of your disbursement- either over some time or a lifetime.
- You sign an annuity contract issued by your insurance company for legal binding.
- Income is supplied either by accumulation and annuitization or lifetime payments.
- You can make a one-time payment and receive income as preferred or, pay in accumulation which will grow over a period -decided by you- and the tax is deferred until you start to receive regular income.
Annuity contracts are high-risk investments for your insurance company, but these risks are managed by charging fees for investment management and other services.
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2 Annuity Configuration types
These two configurations are widely known as immediate annuity and deferred annuity. You may also refer to them casually as a get-paid now or later annuity configuration.
Immediate annuity
This configuration accepts a one-time purchase and has a structured and customizable payment plan immediately after purchase. Its benefits include; lifetime payment, beneficiary protections, and alternative retirement savings. Taxing depends on the method of annuity purchase. Finally, immediate annuities can either be fixed or varied.
| Pros | Cons |
| Guaranteed Income | no access or control of your money |
| No maintenance or service fees | In the absence of features that adjust inflation, the purchasing power of your investments will be affected by inflation. |
| Easy to run | Variable SPIAs are riskier |
| One-time emergency cash withdrawal | — |
Deferred annuity
Deferred annuity: For this type of configuration, there is always an accumulation phase before a payout phase. It allows your investment to increase to a certain level before you start receiving payments. It has a rapid growth rate because of its future predetermined date. There are three types of deferred annuity.
| Pros | Cons |
| Tax-deferred | savings solutions are short–termed |
| No loss due to return rates | Opportunity cost |
| Death and lifetime benefits | High tax rates on income |
| — | Costly maintenance |
3 Main types of annuity
Fixed annuity– For fixed interest rates
| Pros | Cons |
| Fixed interest rates | Taxed as normal income |
| Lifetime payments | No protection from inflation |
| Low risks | Early withdrawals attract penalties |
Varied annuity– For flexible income
| Pros | Cons |
| Tax-deferred on earnings. | You may or may not earn interest on your investments. |
| It includes death benefits. | Difficult to use and understand for most investors |
| Withdrawal of initial investments in case of poor performance. | Taxing is the same as when you earn income. There other funds expenses you may not be initially aware. |
Fixed Indexed annuity– For growth potential
| Pros | Cons |
| The value of your investments increases in value when your stocks increase. However, if there is no increase in stocks, your lot is preserved. | Sales commission is high. |
| It is tax-deferred | Value in stocks will not reflect an increase if the gains of your contract are capped. |
| It has good rates | Extra fees are not properly accounted for. |
What is insurance?
In simple terms, insurance transfers the risks of loss from your life and property into your insurance company. Unfortunately, there are no life forecasts devices that keep you updated on what next may happen to you or your properties. For this reason, insurance will legally bind you and the insurance company together to protect you from any loss caused by contingencies.
How does insurance work?
A legal agreement between you and your insurance company is established via what is known as an insurance policy. This insurance policy consists of terms and conditions under which you are insured. In most cases, the premium for an insurance cover is less when compared to the insurance that your company offers. However, the decision to insure you or not depends on your insurance company and how high the risk they are willing to take is.
Types of Insurance
There are different types of insurance policies that are available, but the most common are;
- Life insurance
- Car insurance
- Education insurance
- Home insurance
- Health insurance
Annuity vs. Insurance; Differences
| Annuity | Insurance |
| Annuities are provided by insurance companies, but are different from insurance policies. | Insurance is simply protection from loss be it property or financial loss |
| Sacrificing liquidity when purchasing annuity products may not be wise. If it does not match your financial goals, then it is not worth it. | Insurance is for anyone young or old, as long you are able to choose what policy/ policies is right for you. |
| The growth rate is conservative because it is over a long time. Hence it is not an aggressive investment strategy. | You keep investing until something happens. It might make it difficult for some people to keep up. |
| Annuities include commissions and other fees. | — |
| Annuity products are not suitable for young investors who see opportunity cost as a drawback. It is more beneficial to the old and retired who do not want to outlive their savings. | — |
| Long-term income is guaranteed, it means that you don’t have to worry about outliving your savings. It depends on how long a person lives. | Insurance grows in value over time, and there is no distribution of funds over a given period instead, it depends on how soon mortality or other contingencies occur. |
| Annuity interest rates fluctuate with the stock market index. | |
| Beneficiaries from your annuity will receive part or remaining annuity payments upon death benefits. | Some policies like life insurance, for example, are based on death benefits in that beneficiaries receive income after the insurer’s death. |
| Annuity products protect from loss of initial deposits. |
Annuity vs. Insurance: Similarities
- They both include death benefits
- They are both issued by insurance companies
- They both offer tax-deferred growth
- They both depend on the terms and conditions of your contract
- They both include extra fees.
References
- Daniel Kurt, Marguerita Cheng, Marcus Reeves (2021, March 19) Annuity definition: Types and tax treatment. Retrieved from https://www.investopedia.com
- Kim Borwick, Emily Miller, George F. Shave III, RICP ( 2022, January 18) How annuities work; rates, types, Pros and cons. Retrieved from https://www.annuity.org
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