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Life Insurance and Annuities
Buying life insurance requires a certain amount of research before you even begin comparing life insurance quotes and part of that research is learning the terminology of life insurance policies. One term that might not be completely clear is “annuity.” At its most basic level an annuity is an investment vehicle sold by life insurance companies providing monthly payouts to the purchaser that typically begin after retirement. Annuities come in two flavors, fixed and variable.
Fixed annuities
When you buy a fixed annuity you give your life insurance provider a lump sum of money in exchange for a fixed monthly payment for a specified amount of time. With a single premium deferred annuity (SPDA) you set the date for the payments to begin, and after retirement is a very common choice. Single premium immediate annuities (SPIA), like the name suggests, provide immediate monthly payments on the investment. Both fixed annuity options are used to convert a lump sum of money into regular monthly income, and can be considered tax-deferred investments.
Variable annuities
A variable annuity is an investment vehicle designed for retirement savings combined with your life insurance with no predetermined rate of return. Variable annuities invest in stocks and bonds and can provide higher returns than fixed annuities. Variable annuities are tax-deferred like fixed annuities and the life insurance policy provides the tax deferral. They offer four main features: you name a beneficiary to receive the remainder of the account at your death; they offer annuitization so you can receive payments based on your life expectancy; the life insurance element of variable annuities provides some investment guarantees; and the earnings are tax-deferred.
Once you’ve done your research and understand annuities and other life insurance terminology, it’s time to start a life insurance comparison. Remember life insurance comes in two distinct types – term and permanent. And to add even more choices to the mix, both types of life insurance can be purchased in a number of configurations. The reason for all these options is life insurance is not one-size-fits-all and when comparing life insurance you want to make certain you are comparing apples-to-apples. One other element to keep in mind is life insurance can be a major part of your financial planning with many life insurance policies offering more than simple death benefits.
Did You Know? Fixed annuities can be purchased for a fixed period of payments, or can be “annuitized” to provide monthly payments for your entire life.
Takeaways:
- Annuities are an investment vehicle.
- Fixed annuities turn a lump sum of money into a monthly income stream.
- Variable annuities combine investment in stocks and bonds with your life insurance policy.
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