An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you in the future or provide a tax-deferred growth option for your retirement money.
Annuities typically include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payment/payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.
There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing.
Life insurance is a contract between the policy owner and the insurance company, where the insurance company agrees to pay the designated beneficiary a sum of money upon the occurrence of the insured individual’s or individuals’ death or other event. In return, the policy owner agrees to pay a stipulated amount (at regular intervals or in lump sums). In the United States, the predominant form simply specifies a lump sum to be paid on the insured’s demise.
The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the ‘peace of mind’ experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the insured.