What is the Difference between Life Insurance and Annuity?

Did You Know That Life Insurance Proceeds Are Generally Considered As Non-Taxable Income?

1) Annuities provide an income stream during your lifetime so that you won’t outlive your assets. You receive the benefits from the plan, and the money is intended to help cover your expenses during your retirement years. Payments can begin as quickly as within a year after purchasing the annuity and therefore some people use annuities to supplement retirement income from Social Security payments, a pension, or a 401(k).

Life insurance, on the other hand, is designed to protect your loved ones financially after you die. Your family receives the payout, not you, helping them meet immediate financial needs and reach longer-term goals.

2) The amount you invest in your plan is upfront. Some annuities require a lump sum payment that could reach into the hundreds of thousands of dollars.

With life insurance, however, you make regular payments into your policy. Those payments are usually monthly, although you may be able to make them annually or on another schedule. It’s easy for most people to fit those life insurance payments into their monthly budget.

Receiving Life Insurance Proceeds in the Form of Installments

As a beneficiary, Sarah chooses to receive $40,000 of life insurance proceeds in 10 annual installments of $6,000. Each year, Mary can exclude from her income $4,000, ($40,000 ÷ 10) as a return of principal. The balance of the installment, $2,000, is taxable as interest income.

Useful Tips:

  • The proceeds of life insurance pass directly to the beneficiaries without going through probate.
  • The benefits of life insurance are not generally subject to federal income tax.
  • Variable annuities are generally tax deferred until you make with drawls.
  • Variable annuities are usually not suitable for meeting short-term goals.
  • Variable annuities also involve investment risks, just as mutual funds do.

Life Insurance and Annuities can serve as Great Estate Planning Tools.

Read Also: How Does An Incomplete Contract of Sale Help With Tax Savings?

Leave a Reply