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An Annuity vs. Other Investments - AnnuitySchool.org

An Annuity vs. Other Investments

An annuity is one way to invest for the future.In exchange for funding the annuity, the financial institution agrees to pay the owner a regular income at some future date. This is different from other forms of investments or insurance policies. There are many ways to save for your retirement years. Discovering what investment suits your financial needs requires comparing other forms of investment with annuities.

Annuities vs. Life Insurance

Life insurance is a contract between an insurance company and a policy holder. The purpose of insurance is to provide for the beneficiary of an insurance policy following the death of the insured person. Annuities also offer death benefits to the beneficiary named in an annuity. But the main difference between life insurance and annuities is that an annuity contract is designed to benefit the annuity owner.

An annuity provides income for the retirement years. Life insurance provides income for the beneficiary of life insurance policy. Another difference between annuities and life insurance is that the annuity increases in value over the years. With most life insurance policies there is a lump sum the beneficiary gets based on how much the policy is for such as a $50000 or $100000 policy.

Annuities vs. Life Expectancy Insurance

Life expectancy insurance policies are issued for the amount of years that the insured person is expected to live. Insurance companies utilize statistics to determine how long a person will live based on factors such as current age, gender, lifestyle habits, health conditions and family history.

The expected life expectancy determines the amount of the premiums. Younger people are a lower risk because they are expected to live longer. Older people are more likely to die in the near future so there are higher risks to the insurance company. Older people pay higher premiums than younger people. Annuities premiums are usually determined by the amount of money the annuity owner wants to invest in the annuity.

Annuity vs. IRAs

Both the annuity and the Individual Retirement Account (IRA) offer the owner the opportunity to save money for retirement. Both also allow owners to delay paying taxes on the earnings until withdrawals begin after age 59 ½.  But there are differences between annuities and IRAs also. Contributions to annuities aren’t tax deductible whereas contributions to IRAs are tax deductible depending on your tax bracket. IRAs also have a maximum allowable annual contribution limit. There is no limit to how much money you can contribute to an annuity.

Annuities vs. CDs

CDs or certificates of deposit are bank accounts with a fixed rate of interest for a specific period of time. During that time the investor cannot withdraw the money without incurring penalties. CDs are a good investment for those who prefer low risk. CDs are free from market fluctuations.

With CDs the bank determines the minimum deposit to open an account. Annuity contributions are determined by the agreement between the annuitant (annuity owner) and the financial institution setting up the annuity. Annuities also have higher interest rates (in most cases) than CDs.

Annuities vs Bonds

Bonds and annuities both offer low risk and relative safety compared to other investments. But there are also differences. Bonds are issued by companies and governments as a way to raise money. Bonds pay income at regular intervals before the maturity date or due date.

Annuities are set up by financial institutions and regulated by the federal government. Annuities grow in value then provide regular income at a predetermined time in the future. Bonds can also be sold in the open market without being penalized. But selling annuities before the distributions go into effect usually comes with a surrender charge and other penalties.

Investing is a way for people to make money. But with so many investment options available, it is necessary for an investor to ask himself what he wants from an investment. Annuities are good for those who want to save extra money for the retirement years. Bonds and CDs are for people wanting a fixed return on investment for a specific period of time. Life insurance polices are usually for the beneficiary after the insured person dies. When determining the type of investment to get, you need to decide if you want income now or later or if you want an investment that helps you financially or your beneficiaries.