Life Insurance and Annuities - Simple Comparisons
The fundamental purpose of life insurance is to “create” an estate or principal sum while the fundamental purpose of an annuity is to “liquidate” a principal sum. Even though they are designed for different uses, both annuities and life insurance share the same mortality, pooling, protection, and investment principles.
The first common feature of life insurance and annuities is that contributions made into them are based on probabilities of survival and death found in mortality tables. Despite the fact that these tables are different, mortality is the common feature that is the foundation upon which the next three commonalities rest.
Second, they both share in the pooling technique, even though they are different in process. Simply put, pooling is how the insurance company spreads out its risk. The annuity has a pooling arrangement where those who had died prematurely contributed so that those who will live beyond their life expectancy won’t outlive their income. On the other hand, a life insurance contract has a pooling arrangement where all insureds contribute so that the dependants of those who die prematurely are compensated on some level for the loss of income.
The third similarity is directly related to the former, because of the pooling technique, both annuities and life insurance can protect people from a loss of income. Life insurance provides protection against a loss due to premature death. An annuity by comparison, provides protection against a loss of income due to excessive longevity. Life insurance will provide a hedge against dying too soon, while annuities will provide a hedge against living too long.
Lastly, both annuity and life insurance utilize compound interest experience to set coverage rates. Generally as interest rates go up, premium rates go down, and when interest rates go down insurance rates go up.
From a financial standpoint both life insurance and annuities are desirable. Whether you have longevity in your family or not, keep in mind that health, or lack there of, is not the only reason for death to occur. It would be wise to leverage your insurance and financial needs to prepare for the unexpected. As I always say, “prepare for the worst, but hope for the best.”
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.