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Jump to: Fixed Annuities | Cash Value Life Insurance
Fixed Annuities
A fixed annuity provides guaranteed retirement income payments. With a fixed annuity contract, you make one or several payments to the annuity provider, in turn, they promise to pay you a fixed return on your contributions, no matter how markets are performing. This ensures you have a stable income throughout your retirement.
How does a fixed annuity work?
A fixed annuity provides a guaranteed return on contributions you make as a lump sum or over a set period of time.
The period you make contributions to a fixed annuity is referred to as the accumulation phase, and the period in which you make withdrawals is called the distribution phase.
With a fixed annuity, you can choose to receive guaranteed payments for a set number of years or a lump sum payment. Note that the period of guaranteed payments is restricted by the terms of the contract.
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Pros and Cons of Fixed Annuities:
Advantages
Simplicity. You can easily compare terms and rates to find the best offer for your needs. By comparison, indexed annuities and variable annuities are complex and riddled with underlying fees.
Guaranteed returns. When you sign up for a fixed annuity, the annuity will guarantee a minimum investment return for the life of the contract.
Predictability. Since a fixed annuity earns a set return, you can predict how much you’ll be earning in the future, making it much easier to plan for retirement.
Disadvantages
Less upside. While a fixed annuity avoids market losses, the tradeoff is that it doesn’t share in market gains.
Guaranteed returns eventually end. The annuity company will only guarantee your fixed, minimum return rate for a certain number of years after you sign up. Once that period ends, they will still keep paying you interest, but the renewal rate could be lower than when you first signed up.
Inflation could hurt returns. During periods of high inflation, a fixed annuity may not grow your savings quickly enough to keep up. Adding a COLA rider could help your fixed annuity payments avoid losing value due to inflation.
Cash-Value Life Insurance
What is cash value life insurance?
The phrase “cash value” refers to a savings component of permanent life insurance policies, such as universal life or whole life insurance. A portion of your insurance premium — the price you pay for the policy — funds the cash value account, which grows over time.
Unlike the policy’s death benefit, which pays out to the beneficiary after the insured person dies, the money in cash value accounts is available to policyholders while they’re still alive.
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Advantages of cash value life insurance
Here’s what you can do with the cash value in a life insurance policy:
- Make partial withdrawals. If the money is not repaid, the withdrawals will reduce the policy’s death benefit.
- Borrow against the cash value. You can take out loans for anything you’d like. You’ll have to repay them, though, with interest, to maintain the death benefit.
- Surrender the life insurance policy for the cash value. This will end your coverage, and you may have to pay a surrender fee to the insurance company. The cash surrender value of life insurance is based on the type of policy and how long you’ve had it.
- Use it to pay premiums. Once the cash value reaches a certain level it can be used to pay the premiums due.
Types of cash value life insurance
How the cash value grows depends on the kind of permanent life insurance policy you buy.
- Whole life insurance cash value has a guaranteed fixed rate of return. A whole life policy is the most straightforward kind of permanent life insurance because everything is fixed and guaranteed — the premiums, the death benefit and the return on cash value.
- Universal life insurance ties cash value growth to investments, such as bonds and stocks. These policies allow you to adjust your premium and coverage amount.
- Indexed universal life is a type of universal life insurance that links cash value growth specifically to a stock index.
- Variable life and variable universal life allow the policyholder to invest in various accounts of stocks, bonds or mutual funds. These types of policies offer the greatest potential returns, but they come with the risk that you could lose cash value if the investments perform poorly.
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