Have you ever wondered why so frequently life insurance companies are also in the business of selling annuities? Well, the answer is quite simple. Life insurance companies take a huge risk in betting that you’ll live a very long time to pay your monthly premiums to ultimately collect a payout smaller than the sum of its parts. To counteract that risk, they also take bets that you’ll live a very short time via annuities, where you may only live a few years of time to receive payouts much smaller than the face value of your annuity.
For them, it’s just business. For you, well, it’s just business too. You have to decide which is a better investment, and how to allocate your money for each. The thing is, you only have a limited amount of money.
First you need to decide how much life insurance you should have. I should mention that many people are either grossly uninsured, or grossly overinsured. That is, having far too much or far too little insurance for their needs.
If you’re young, have a family, and a spouse that absolutely cannot live without your income then you need to have a lot of life insurance. Imagine, one day you just don’t wake up, you’re dead as a doorknob just a few years after buying a house—a purchase made on the premise of having two incomes. While for the first few days it will be an emotional strain as loved ones grieve, the next few decades will be even more difficult as your spouse struggles to pay for the expenses of a family without you.
In this case, you absolutely need to have enough life insurance to cover expenses for your children and living costs for your spouse. In many instances, couples get away with planning to have enough money to pay off the mortgage, cars and other debts, as well as college expenses for children and funeral costs. The good news is that because you’re young, buying enough insurance to cover it all will be insanely cheap.
However, if you’re older, or just in your twenties, buying too much life insurance is a huge problem. When you’re 65, you’re kids are out of the house and your home is paid off, there is little reason to have any more life insurance to pay for funeral costs. You might not even want to have that insurance at all!
At 20, single, and searching to start your career, you probably want just enough to cover funeral expenses. Though be sure to ask mom and dad, you might already be covered by a policy they owned since your childhood.
Annuities are something that you should start thinking about as you near retirement age. Whereas life insurance was a really good deal as a 30 year old with a wife and kids, it isn’t any more. Now your best investment is in yourself, and your standard of living, until the day you die.
At this point, life insurance will be horribly expensive. So, if you haven’t yet covered the cost of an expected funeral, or haven’t preplanned, then you may want to seek out an insured annuity. With an insured annuity, you’ll get the remainder of your annuity’s balance at the end of your death. This is most often used to cover funeral and burial costs.
Your best bet is to reduce your life insurance while kicking up contributions made into a retirement plan or annuity. As you age and advance through the milestones of life, you should be reducing your total insurance needs and increasing your retirement planning. An annuity is an excellent replacement for monthly life insurance premiums and by the time you retire you’ll be more than happy you saved a few extra dollars.