TONY'S BLOG
 
Life Insurance vs. Annuities

September 14, 2016

In last week’s post, I touched on the issue of life insurance as contracts and how and why you always name a beneficiary to receive those benefits and inform the beneficiary that they are named so that when you croak, the can collect the money.

 

In this post, I want to talk about annuities.

 

In some ways, annuities and life insurance are “kissing cousins.” Both are issued by insurance companies. If structured properly, both of them avoid probate at death. Both of them are contracts. Both of them require the insured to place with the company something called a premium, and both of them allow the insured to name beneficiaries so that upon death, the beneficiaries can quickly collect the proceeds from either of these contracts.

 

While the life insurance pays off in the form of cold-hard-tax-free cash, the annuity does not. In fact, many beneficiaries are surprised to learn that upon receiving an annuity claim upon the death of the insured, some of that money is subject to ordinary income taxes. This is assuming the annuity was classified as non-qualified. If the annuity is held in an IRA, just like any other asset in an IRA, the proceeds to the beneficiary are 100% fully taxable at ordinary income rates.

 

For me personally, I think the best of both worlds is to own life insurance AND annuities. I have a sizeable life insurance policy that will provide cold-hard-tax-free cash to my loved ones at death and I also own a substantial amount of non-qualified fixed indexed annuities that will provide Mailbox Money® to me for life. This simple strategy allows me to use and enjoy my annuities guaranteed for the rest of my life. Then, when I die (not if,) regardless of how much is left in the annuities, my family gets the lump sum tax free life insurance immediately.

 

A win-win for everyone.