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Comparing life insurance and annuity death benefits

If you have someone in your life who would suffer financially when you’re no longer here, then it is possible that you need life insurance and/or an annuity that offers a death benefit. These funds can typically be used for anything that the recipient(s) wants or needs – and they can go a long way in helping to ensure that loved ones won’t have to struggle monetarily.

Types of Life Insurance Death Benefits

There are two primary categories of life insurance. These are term and permanent. Term life insurance policies are purchased for a specific period of time, such as one year, five years, ten years, twenty years, or even for thirty years.

With level term life insurance, the amount of the death benefit and the premium payment will typically remain the same throughout the lifetime of the policy. If the insured dies while the policy is in force, a death benefit will be paid out to one or more named beneficiaries.

Permanent life insurance offers both death benefit protection and a cash value component. In many cases, the death benefit and the premium can remain the same – and as long as the premium is paid, the policy will remain in force… even as the insured gets older.

The cash in the policy grows on a tax-deferred basis, meaning that there are no taxes due on the gain unless or until the funds are withdrawn. The money in this account can be accessed by withdrawals or loans.

The death benefit that is paid out from a life insurance policy is typically income tax-free to the beneficiary(ies). This means that 100% of the payout may be used without having to hand over any of it to Uncle Sam.

How Annuity Death Benefits Work?

Annuities are actually a type of insurance contract. There are also many different types of annuities. The two primary categories are immediate and deferred. Immediate annuities start to pay income right away – or at least within 12 months – of purchasing it, while the income payout from a deferred annuity can begin at a time in the future.

Many annuities include a death benefit. This is oftentimes triggered by the passing away of the income recipient, or annuitant (although there are some annuities in which the owner’s death will trigger a payout of the death benefit).

With a standard annuity death benefit, there are a couple of ways to determine the payout. For instance, any of the remaining contribution could be paid to the named beneficiary(ies). So, for instance, if you contributed $400,000 to the annuity, and it paid out $200,000 in income before the annuitant’s death, then the remaining $200,000 would be paid to the beneficiary upon his or her passing.

Depending on the annuity, another option for the death benefit could be to choose a preset minimum amount. But in either case, the amount of these payouts could be unpredictable. As an example, the higher the value of the annuity – and the more value that is remaining in it when the annuitant (or the owner) passes away, the larger the death benefit is likely to be.

In some cases, the offering insurance company may allow the amount of the death benefit in an annuity to increase based on:

  •  Market-linked increases
  •  Annual increases

One of the key differences between life insurance and annuity death benefits has to do with taxation. While life insurance proceeds are usually free of income tax liability, the death benefit proceeds that are received from an annuity are not.

For example, any of the amount that is considered to be a gain will be taxable. Therefore, if you made $200,000 in annuity contributions, and the value of the annuity was $250,000 upon your passing, $50,000 of the death benefit payout would be taxable to the beneficiary.

How to Create an Ongoing Retirement Income and a Legacy

Annuities can allow you to generate an ongoing stream of income – either for a preset period of time or even for the remainder of your lifetime. These financial vehicles can also provide a legacy for your loved ones if the unexpected occurs.

With a deferred annuity, you can also build up your account on a tax-deferred basis, which can give you some nice immediate tax benefits. Therefore, you are able to reap several different benefits using just one single financial vehicle.

But there are many different types of annuities, though, so it is important that you have a good understanding of how they work, and which one(s) may or may not be right for you, based on your objectives and risk tolerance, as well as your time frame until retirement.

If you would like to learn more about annuities and compare various annuity options (even annuities that you already own), feel free to contact Annuity Gator and chat with an annuity specialist.

At Annuity Gator, our mission is to educate consumers and financial professionals on how annuities work, and where they may fit in with other assets in a portfolio. So, if you have any questions about annuities, you can reach us directly by calling (888) 440-2468 or by sending us an email. We look forward to meeting you.

Comparing life insurance and annuity death benefits

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