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Life insurance and annuities solve different problems. Life insurance protects the people who depend on you if you die. Annuities protect you from running out of money while you are alive. This guide explains the four products our calculator asks about, in plain language.
Term Life Insurance
Term life covers you for a fixed period, commonly 10, 15, 20 or 30 years. If you die during that period, the insurer pays the death benefit to your beneficiaries, generally free of federal income tax. If you outlive the term, coverage ends and nothing is paid.
How it works
- You choose a coverage amount and a term length.
- Premiums are usually level for the whole term.
- There is no cash value; you are paying only for protection.
- Many policies can be converted to permanent coverage without a new medical exam, within a set window.
May be a fit if
- You need the most coverage for the lowest cost.
- Your need has an end date: children growing up, a mortgage being paid off, years left until retirement.
Things to consider
- Renewing after the term ends is much more expensive, because the price is based on your age then.
- If your health changes, new coverage may be hard to get later.
Whole Life Insurance
Whole life is permanent insurance. It stays in force for your entire life as long as premiums are paid, and it builds cash value at a rate guaranteed by the insurer.
How it works
- Premiums are fixed and never increase.
- Part of each premium goes into cash value, which grows tax-deferred.
- You can borrow against the cash value; unpaid loans and interest reduce the death benefit.
- Some policies from mutual insurers may pay dividends, which are not guaranteed.
May be a fit if
- You want coverage that never expires, for final expenses or to leave money to family.
- You value guarantees and predictable premiums.
Things to consider
- Premiums are considerably higher than term for the same death benefit.
- Cash value grows slowly in the early years, and surrendering a policy early can mean getting back less than you paid in.
Indexed Universal Life (IUL)
An IUL is permanent insurance with flexible premiums and a cash value account. Interest credited to the cash value is linked to the performance of a market index such as the S&P 500, but your money is not invested directly in the market.
How it works
- A floor (often 0%) means the index-linked account is not credited a negative return in a down year.
- A cap or participation rate limits how much of the index gain you are credited in a good year.
- Policy charges and the cost of insurance are deducted from the cash value every month, including in years when 0% is credited.
- You can adjust premium payments and, within limits, the death benefit.
- Cash value can be accessed through withdrawals or policy loans.
May be a fit if
- You want lifelong coverage and the potential for more cash value growth than whole life.
- You can fund the policy consistently over many years.
Things to consider
- IULs are complex. Caps, participation rates and charges can change, and illustrations are projections, not guarantees.
- If the policy is underfunded, rising costs can drain the cash value and cause the policy to lapse.
- Loans and withdrawals reduce the death benefit and can create a tax bill if the policy lapses.
Annuities
An annuity is a contract with an insurance company. You pay a lump sum or a series of payments, and in return the insurer grows that money and can pay you an income, for a set period or for the rest of your life. Annuities are a retirement and savings product; they are not life insurance, although many include a death benefit for beneficiaries.
Common types
- Fixed: earns a guaranteed interest rate for a set period, similar in spirit to a CD.
- Fixed indexed: interest is linked to a market index with a floor that protects principal from market loss and a cap or participation rate on gains.
- Immediate: starts paying income right away in exchange for a lump sum.
- Variable: invested in market subaccounts; value can go up or down. These are securities and are sold by prospectus.
May be a fit if
- You are near or in retirement and want income you cannot outlive.
- You have savings you want to protect from market losses while growing tax-deferred.
Things to consider
- Most annuities have surrender charges if you take out more than an allowed amount in the early years.
- Earnings are taxed as ordinary income when withdrawn, and withdrawals before age 59½ may carry an additional 10% federal tax penalty.
- Guarantees depend on the claims-paying ability of the issuing insurance company.
What does “safe money” mean?
“Safe money” is a common way to describe insurance products, such as fixed and fixed indexed annuities and cash value life insurance, where principal is protected from market losses by the insurer’s contractual guarantees. Safe does not mean risk-free: guarantees rely on the financial strength of the insurance company, and fees, surrender charges and taxes still apply.
This page is general education, not financial, tax, or legal advice. Product features, availability and guarantees vary by insurer and by state. Review the policy or contract and talk with a licensed professional before buying.