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Temecula, CA 92591

Insurance and Annuities

“You don't buy life insurance because you are going to die, but because those you love are going to live.” 

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Life Insurance And Annuity

Providing yourself financial protection today is a smart move to protect you and your family’s future. Several financial products are readily available to help you build a suitable investment plan that will ensure a comfortable life for you and your loved ones. Among the financial products that we offer, life insurance and annuities are perhaps two of the most popular options. 

Both life insurance and annuities involve a long-term investment that comes with risks and benefits.  These days, it is not uncommon for someone to own both, however, use of either or both still largely depends on the customer’s needs.

To know which financial product fits your circumstance, it is important to understand how life insurance and annuities differ from one another, the pros and cons of each, and what you should consider before purchasing either.

Life Insurance

Life Insurance

Life insurance policies are mainly offered to clients to provide financial protection for their loved ones should they pass on unexpectedly.

Clients who usually purchase life insurance are those who have loved ones who depend on them for financial support. 

Purchasing a life insurance policy can be a solution if you’re a parent with young kids and looking to ensure their welfare in case of your untimely passing.

Whatever happens to you, it will give you peace of mind knowing that you’re leaving them with financial protection that will possibly cover their education and future.

Types of life insurance

If you’re thinking of buying life insurance, there are two types to understand:

1. Term life insurance

This type of life insurance provides coverage for an assigned period of time (e.g., 10 or 20 years). Customers who buy this life insurance want coverage until their retirement age or to get financial protection for a specific time period. Term life insurance doesn’t have an investment component. 

There are two types of term life insurance:

Annual renewable term: This term life insurance offers a year of coverage, which starts on the period that you renew your policy every year. With this insurance, you pay a low premium on your first year, but the amount you pay gradually increases as you age.

This life insurance is ideal for people who are just starting out and want to start premiums low now but expect to have increased income in the future. 

Level premium term: This type of term life insurance offers coverage for a specific period of time. You may buy this insurance if you want to get financial protection for a period of five, 10, or 20 years, etc.  

This is good insurance if you want the certainty of having your premiums locked in for a certain period of time. The good news is that the premium you pay every year is guaranteed to remain the same until the end of the specified term.

Life Insurance

2. Permanent life insurance

Also called cash value insurance, this type of life insurance provides financial protection for your entire life, not just a specified period of time. It comes with a savings or investment component which builds cash value.

There are three kinds of permanent life insurance:

Whole life insurance: A life insurance policy that marries life coverage and a savings component. From the payment or premium you make (which remains fixed throughout your insurance policy’s life), a portion goes to the life insurance and the rest goes to the savings component that builds cash value.  

The cash value component of this type of permanent life insurance is tax-deferred, and remains so each year that you keep your insurance policy. You are allowed to borrow from this accumulated cash value without being taxed.  Any amounts borrowed from the policy will reduce the death benefit.

Universal life insurance: This insurance combines life insurance coverage and a savings component. The main difference between whole life and universal life, is flexibility.  Your premiums are flexible in that you can increase or decrease your payments over time.  

Variable life insurance: Under this type of insurance, a portion of your premium goes to an investment fund. The money is usually invested into a sub-account, similar to a  mutual-fund investment, which means returns are not fixed or guaranteed.

Variable universal life insurance falls under this category as well, which combines both universal and variable life insurance.

Benefits of life insurance

  • Supports your loved ones financially 

    Should you die unexpectedly, you can take comfort in the fact that your family will be covered financially. This is particularly important if they depend on you for financial support.  Death benefits are tax-free.

  • Covers expenses in connection to your death

    Life insurance can be used to pay for funeral costs and other related expenses. This way, your loved ones won’t have to worry about paying for funeral or burial expenses.

  • An affordable way to provide financial protection for your family

    Buying life insurance won’t put a big dent in your wallet. You can get term life insurance very inexpensively!

    On top of the affordability, term life insurance also offers flexibility. You can cancel anytime, or you can even convert a term life insurance into a full-fledged permanent life insurance policy. 

  • Allows you to enjoy your money while you’re still alive

    If you purchase a permanent life insurance policy, you may borrow a portion from its cash value should you need money for any kind of financial emergency.   

  • It is tax-deferred

    The cash value of your permanent life insurance is tax-deferred. 

Disadvantages of life insurance

  • It can lapse

    You or your family won’t get anything in the event that your life insurance lapses.

  • It doesn’t come cheap, depending on the type of life insurance you purchase

    Permanent life insurance isn’t as affordable as a term life insurance policy.  If you are going to buy a whole life type of policy, you will need to keep the cost of premiums in mind when designing your policy and deciding what’s best for you.

  • You are only buying insurance, if you opt for a term life insurance

    With term life insurance, you do not have cash value and therefore have no borrowing ability.  Term Life is cheap because it is just straight insurance.  No bells or whistles.  As long as you pay for it, you have it.

  • Expect to pay additional fees

    There are fees involved on whole life insurance policies, or terms that have riders.  Be sure you understand the fees associated with what you are buying.

Annuity

Annuity

An annuity is an insurance product that provides an income stream.  In essence you are creating your own personal pension plan.  

Good financial planning involves understanding your income in retirement.  Your possible income sources are investments and retirement accounts, pensions, and social security.  An annuity can also be one of your income sources.

When you buy an annuity, you are basically saving and building a pot of money that you will eventually turn into an income stream that will be paid out to you systematically (like a monthly income). You may arrange to receive income from your annuity every month, every quarter, or every year.

You may even opt to receive a lump sum payment. Your income stream can be arranged to be paid for a set number of years or for the rest of your life.

Types of annuities

Annuities can be purchased so that you are paying into the annuity for many years, and your payout will be deferred until retirement.  Or you can purchase an annuity that pays you an income stream right away.  Here are the two types of annuities:

1. Deferred

Under a deferred annuity, you make payments over time (10, 20 or 30 yrs or more) to the annuity to build it up, so that at a later time you can then turn on your income stream.  The money grows tax-deferred and is put into either a fixed account or various investment options of your choosing.

2. Immediate

With an immediate annuity, you are looking to invest a large sum of money now and immediately turn on the income stream.  If you’re planning on retiring soon but don’t have a guaranteed floor of stable income, then this type of annuity may fit your needs.

Within these two types of annuities, you have the option of purchasing a fixed annuity or a variable annuity.

  • Fixed annuity: A type of annuity that provides a fixed rate of return.  No investments.

  • Variable annuity: Under this type of annuity, your premiums are invested in sub-accounts, similar to mutual funds.  There is no guaranteed return on your investment.  You are subject to market risk, hence the return is variable.

Benefits of annuities

  • No limit to the contribution

    You can invest any amount in your annuity as there is no limit to how much you want to contribute.

  • Less risk

    Fixed annuities offer a no risk way of building some retirement income.  Additionally, any premiums paid into an annuity becomes a guaranteed death benefit.  So even if your investments are down on the day of death, you will get back what you put in.
Annuity
  • Guaranteed interest rate

    When you buy a fixed annuity, you don’t have to worry about any investment risk. The insurance company guarantees an interest rate for a specified period of time.  The rate is periodically updated based on current interest rates.

    With variable annuities, you take on the investment risk and there are no investment guarantees.  Your performance is dependent on the investment choices you make.
  • The decision as to where to invest is yours

    With a variable annuity, you can choose to invest your money in whatever investment options are available in that specific policy.  Each policy offers different investment choices.

  • Money grows tax-deferred

    Investments into annuities grow tax-deferred.

  • You may enjoy payouts for the rest of your life

    You can choose to receive your income stream for a certain period of time, or for the rest of your life. The longer you receive your income, the smaller each payment will be.

Disadvantages of annuities

  • Payouts are taxable

    Your income will be taxable.  Depending on if you invested qualified money or non-qualified money will determine how much of your withdrawals will be taxable.
  • You may not get to keep all your payouts

    When you start your income, you have the option of annuitizing the policy.  If you annuitize the policy you are giving all your money to the insurance company, for a guaranteed income stream for the length of time you choose. 

    If you choose life only, and you die within 10 yrs, you will probably not get all the money you put in, and there will be nothing available to leave to your beneficiaries.  Always understand your options for taking income!  You do NOT have to annuitize.
  • Payouts depend on the stability of the insurance company

    A guaranteed income stream is only as good as the company making the promise.  Always be sure to check the rating of the insurance company so that you know they will be there when you need them.  
  • Understand the fees you are paying

    As with the life insurance, there are fees in an annuity contract.  Each policy is different, so be sure to understand what you are paying for.

Which one to Purchase?

Both life insurance and annuities have their respective pros and cons, and it is important that you arm yourself with information and understanding before you purchase.

Client Centered

It is highly recommended that you consider your options carefully. After all, you’re putting your hard-earned money into a financial investment that may or may not serve your best interest.  Talk to a professional financial planner who can guide you as you make your decisions.

Leeward Wealth Management can help take the guesswork out of life insurance and annuity planning.

When you need to review your insurance policy or annuity investments, you can trust Leeward Wealth Management to help you build a good investment strategy that you can implement to ensure you and your family’s financial protection.

Reach out to Leeward Wealth today to get you started or to review your current policies.

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