If one had to choose between life insurance and annuities, which would it be? A decision like this would be the equivalent of a man having to choose between his wife and his mother. Those with limited disposable income may find themselves having to choose one financial product over the other. The ideal would be to have adequate protection and accumulation products. In the context of this dilemma, the ideal would be sufficient life insurance coverage and enough savings going towards annuities. Failing this, the next-best option would be to make a situation-based assessment.
What makes a comparison between life insurance and annuities less feasible is the fact that the former is an estate/income protection product while annuities are accumulation products. The logic of financial planning is that protection products have priority over accumulation products. On the other hand, the reality is that not everyone needs life insurance, while the majority of people can benefit from having annuities. However, if you are forced to make a choice between these two financial products, there are certain considerations that you should make.
The first consideration is if you need life insurance at all. Do you fall into the following categories?
1. A person with dependents (that you actually care about)
2. The sole breadwinner in your family
3. A young person who plans on getting married or has visions of starting a family
4. In need of mortgage protection or collateral
5. A business owner who wants to ensure that the business is a going-concern
If you are in any of these categories, preference should be given to life insurance. It is also useful to identify trigger events that may cause the need for life insurance to increase. A trigger event is any change in life circumstances or situation that may require an increase in coverage. Trigger events include the birth of a dependent and the acquisition of a new home.
Even if life insurance appears to be more valuable in your context, establishing how much coverage you need can prevent overspending on a plan and allow you to still invest in annuities. An analysis of the needs that contribute to the overall coverage necessary would help you select the right type of plan. Short-term needs (like a mortgage that lasts for 15 years) can be covered with term insurance. Proper selection may leave you with residual income to invest in annuities.
The most important consideration would be a head to head comparison of a life insurance plan and annuity. You must select the best candidate for each type. A Universal Life plan would be a good choice for life insurance or even a dividend-paying Whole-Life insurance plan. On the annuities side, there are several deferred annuities which may be variable or fixed. One company has similar declared interest rates on its Universal Life plan and its annuity. The difference is actually 0.5% in favour of the annuity. I used the same premium figure in both plans. The result is as follows:
At age 60, the cash value of the Universal Life plan would be $618,000.00. The annuity would provide a full pension of $8,239.00 with no lumpsum available to you. If the available sum from the life insurance ($494,000.00) were invested, $3,180.00 would be an achievable interest-only payment from a fixed deposit plan with an effective annualised rate of 8%. Based on this specific example, the edge seems to be with life insurance if you had to choose. However, if you are single with no plans of having a family, for example, an annuity may be the better option for you. Even in that case, the life insurance plan could still provide retirement income. Also, the future is uncertain and you may change your mind or some trigger event happens to create or increase the need for life insurance. The safer choice might be a lucrative cash-value or dividend-paying life insurance plan.