Protecting your future can encompass many strategies and avenues, some of them conflicting. Yet it remains undisputed that a blueprint of some kind is required to achieve our goals. In the case of planning for the unknown, two insurance instruments stand out as deserving scrutiny.
Planning how you or your family will weather the loss of a wage-earner is the earlier concern, and planning for life after wage-earning is over is the later concern. Both have programs available to deal with these situations, and both have their pros and cons. Term life insurance – for protection during peak earning years Term life insurance is a fixed-length contract that provides life insurance during a specific time period of high concern. For many, this is the child-rearing years and for others, it may be during a business start-up or while a higher level of debt is being paid down. Term life is typically offered for 10, 20, or 30-year durations. The premiums are based on this fixed length and take into account your age, gender, health, and other factors specific to that term. If the policy owner lives beyond the end of the term, the policy simply ends. If the conditions that made you seek protection are still present, you can renegotiate an extension with an eye on your current life and health factors for the new term. The main benefit of this type of policy is that it is a less expensive way to protect against the loss of a significant income when it is being counted upon most.
It is frequently used when the policyholder is younger and healthier, so the premiums are lower than they would be in a whole life policy. On the other hand, it is generally not used as part of estate planning, since there is no residual value when the term ends. This leaves you with the need to re-analyze your family’s needs later in life. Annuities – for protection of income in post-earning years An annuity, by contrast, is protection against outliving your savings. The value of the annuity is accumulated by remitting premiums over time, and is then paid out through a systematic payment, often monthly, providing an income during retirement for the life of the policyholder, or “annuitant.” The annuity is beneficial in building an asset with tax-deferred earnings over many years. Also, new legislation allows the cash value to be transferred tax-free into a long-term care insurance plan if needed.
Unlike 401(k) and IRA accounts, there is no limit to the amount that you can contribute. Some annuities are structured to provide a death benefit, particularly if the annuitant dies before payouts begin, allowing the annuity to represent a part of an estate planning strategy. As with other retirement instruments like the IRA and 401(k), the annuity allows you to directly name a beneficiary, enabling a payout without probate or estate taxes. The annuity does have some drawbacks, among them the possibility of poor performance and unfavorable tax treatment for shorter durations of ten years or less. You would also pay full income tax rates if you withdraw funds before the payout period begins. For either type of insurance strategy, it is important to check the current tax implications and investment projections. An estate planning attorney or a tax adviser can help to weigh the specifics of your situation and the current tax laws. Liza is a financial blogger with an interest in showing readers how to save money and find affordable life insurance.