Insurance and Annuities

Most investors often think of stock and bonds as part of an investment, but in reality, one can add many more things to bolster their portfolio. While it may not seem so initially, insurance and annuities play a role in your long-term financial situation.

Benefits of Whole Life Insurance + Cash Value

Not all life insurance is just about paying out when someone passes away. Some, like whole life or universal life insurance, come with built-in savings accounts called “cash value.” This is money that grows over time without being taxed every year. This allows you to build savings while staying protected, and you can use the cash value in emergencies or to support your retirement.

The way it works with this type of insurance is that when you pay your premium, your money is split into three places: the insurance cost, cash value, and fees. So, your premium covers your protection and the money put into the account for it to grow over time.

Understanding the distinction between insurance as risk management and insurance as an investment is essential. Term-life insurance is risk management because it covers your family, kids, beneficiaries, etc., if something happens to you. However, whole life and universal life insurance are both risk management and investments since you have the protection of a death benefit mixed with growth for your money.

How Can Annuities Work as an Investment?

Annuities are contracts with insurance companies. You give them money, and they promise to repay you later through regular monthly payments. It’s similar to how bonds and CDs work, but serve different purposes. While CDs and bonds involve money being almost locked away from you until later, annuities are like creating your own pension. You pay now, and they pay you later, often for life. For instance, you could use an annuity to supplement your Social Security income or cover essential retirement expenses. It’s more of a retirement focus than anything else.

For fixed annuities, you earn a set interest rate. For indexed ones, you earn up to a set cap based on market performance. Finally, there are variable annuities, where your returns depend on how your investments perform. The bottom line is that when you invest in an annuity, you pay the insurance company a lump sum. Then, you choose when the insurance company starts paying you quarterly/annually for a set number of years or for life.

Here’s a scenario: you’re 50 and invest $100,000 into a fixed annuity. You don’t need income immediately, so you start receiving payments at 65, when you plan to retire. The annuity offers a guaranteed 4% interest, compounded annually. So, over the next 15 years, your money will grow at that rate, tax-deferred. Then, when you turn 65, you convert your annuity into a lifetime monthly income. It’ll start paying you at a fixed monthly rate until all your money is finished. However, it’s important to note the risks associated with annuities. They can be complex and may come with high fees, early withdrawal penalties, and risks due to the company’s financial health (make sure you go with an insurance company with high ratings!)

The Bottom Line

Insurance and annuities aren’t just for risk management if something were to happen to you tomorrow, they’re things that can be used as real investments for your long-term financial benefit. They protect your future and build wealth, so having them as part of your investment plan is a smart move that will benefit you down the line.

Disclaimer:

This blog post is for educational and informational purposes only. It is not financial advice. I am not a licensed financial advisor, and nothing in this post should be interpreted as a recommendation to buy or sell any securities. Trading involves risk, and results are not guaranteed. Past performance is not indicative of future results. Always do your own research and consult with a licensed financial professional before making any investment decisions.