Buying Insurance

Lesson 5: Annuities

This lesson deals with annuities. It outlines what annuities are and how they differ from life insurance. It reviews the parts common to all annuities. Finally, it discusses the various types of annuities and the uses for each.

Annuities Aren't Life Insurance (And Vice Versa)

Although they are both sold by life insurance companies, annuities and life insurance are two different products serving two different needs. Life insurance is intended to pay the full dollar amount of the policy (insurance jargon:face value) at the time of the insured's death, whenever that may occur (see Lesson 5 above). An annuity uses the accumulated value of the policy to provide a guaranteed income stream, typically at some point in the future. As an example, if you have a $100,000 life insurance policy and you die, the insurance company will pay the beneficiary of the policy $100,000. If, however, you purchase an annuity and pay say twelve monthly installments and then die, the insurance company will pay your beneficiary the value of the twelve installment payments, plus whatever interest these funds may have earned, minus the up front charges to issue the policy. This might easily produe a difference of $100,000 versus $1,000. In short, annuities are not a substitute for life insurance and vice versa.

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