Fixed annuities became very common investments when interest rates were really high. They also enjoyed bumps during the market turmoil after the “.com” bubble burst in 2001, and the subprime mortgage crisis in 2008. The reason they became popular during times of high interest rates was because people were locking in really good rates of return which were guaranteed for the rest of their lives, and the reason annuities became popular during market crashes was because of the predictable steady growth that they offer.
So, many people own annuities, and you may be one of them. But if you have an annuity, do you also need life insurance? Well you may or you might not. Annuities come in a lot of different structures, and depending upon the one you own and what your life insurance needs are, you might need life insurance coverage.
First Determine Your Life Insurance Needs
If you know how much money your dependents or spouse need; great! If you don’t, you can always use our life insurance needs calculator, or consult with a financial advisor.
In simple terms, the amount you need is the amount of money that whoever depends upon your income will need in order to continue their standard of living, for the rest of their lives, at least at the current level that they enjoy now. Many people want to pay off the mortgage, and fully fund the retirement for a spouse, for instance. They may also leave money for their children or grandchildren’s educations.
Before you know if your annuity provides enough money, consider quantifying the total lump sum (and remember there is only one chance at giving enough) that your dependent person or spouse needs.
Understand Your Annuity Structure
Different annuities are designed very differently. The first thing you should look at is: does your annuity have a life insurance rider as a part of the product? Some annuities are sold with life insurance attached to them. Make sure yours does not, or if it does that the amount of coverage is high enough to suit your needs. If you have an annuity that provides life insurance, this might be all the coverage you need.
Fixed or Variable?
Secondly, understand if your annuity if a fixed annuity or variable annuity. While these are both annuities, they are vastly different. A variable annuity’s value is tied to the stock market, or bond market, or combination of both. You can think of this like an investment account. While it has potential for higher growth, it also has the potential for much more risk. Don’t assume that your variable annuity will continue to grow, or even remain stable in value. These are good investments but unless the contract contains a provision that provides a minium payout, you should not depend upon it solely to support those who rely on your income.
How is your “Payout Phase” Structured?
Another very important point to consider with your annuity is how the payout phase is structured. Annuities are sold a variety of different ways. Here are a few examples:
- Lifetime income for the annuitant (person who is entitled to the annuity proceeds)- this means that they payments last as long as the annuitant is alive, but once they pass no more money is paid out.
- Lifetime income with 10 year guarantee (or 5 year or 15 or 20 year guarantees)- This means that the annuity is guaranteed to pay an income to the annuitant for as long as they live, but if they die the payments will continue until the annuity is 5, 10, or 20 years old. These remaining payments are given to the named beneficiary, which would normally be a spouse or surviving children. If they outlive these payments, they still stop.
- No lifetime income, just 5, 10, 20 or any amount of years guaranteed.- This type of annuity pays out for the total amount of designed years. If you outlive the payments, they still stop after the designated amount of years since payments start.
- An annuity written for joint survivors.- This type of annuity will continue to pay as long as one of the annuitants is alive. In other words, if a husband and wife are the two annuitants, the payments will last for the entirety of both of their lives.
As you can see different annuities can provide vastly different benefits to survivors. Before you can assess your life insurance needs, you need to understand how your annuity works. Don’t assume that it will continue to provide payments after you pass away!
Is your Annuity Fully Funded?
If your annuity is still in the accumulation phase, meaning you are still paying in to it and don’t yet receive any payouts, don’t assume that you will necessarily live long enough to complete the funding phase. If you pass away before your accumulation value has reached what you desire, you won’t be able to provide the amount of payout to your beneficiaries that they are counting on.
If your annuity is not fully funded, you probably need life insurance. In this case, you can buy yourself term life insurance which last long enough for you to fund the annuity. This will probably be very inexpensive and very worth the coverage.
Let’s say you plan to start getting paid by your annuity when you reach age 62, and you are currently 53. Your annuity represents a significant portion of your retirement income, and your spouse can live on the annuity payments alone at that time. You have 9 years left of paying in until it is funded.
A good idea would be to get a 1o year term life insurance policy. This will cover you through the rest of your savings period until your retirement is funded. If something happens to you in the meantime, your spouse is covered. If you want to save money you can even get a decreasing face policy which will lower the payment each year!
If you Still Aren’t Sure, Get Life Insurance
Having someone who is financially dependent on you is a big responsibility. If you aren’t sure if your annuity can cover them, the safest and best thing that you can do for them and your own peace of mind is to get life insurance. Term insurance is very inexpensive today, and for most people it is well worth the price. Most people under the age of 65 can get a 10 year term life insurance policy with a large death benefit and a very affordable monthly payment, and people who are older still also have affordable options. If you are unsure if you can afford it or not, feel free to get a quote from Life Ant.