Life Insurance provides for you loved ones after you’re gone and annuities provide you with a steady income after you retire. In principal they are rather similar you put a way money in life insurance or annuity and it grows tax-free. However, annuities are eventually taxed when you withdraw. The life insurance on the other hand goes to beneficiaries tax-free.
The policy holders of permanent policies however can borrow against the principle. However there are different types of plans, some with upfront fees, some have limited investment options and other penalize people for early withdrawals. It is always a challenge for insurance companies to find the right angles to make their products attractive despite some of the shortcomings already discussed. Sometimes they are sold based on rate of returns and sometimes based on tax advantages, it all depends on the trends of the time and economy.
Obviously most consumers really have to consider how soon after they will be withdrawing since on earlier withdrawals, the fees would cancel out any interests. Keep in mind on annuities fees could increase if you select additional features, such as guaranteed minimum payouts. And more fees you have less the value of your investment. Besides management fees there are also surrender fees which include the commission annuity company pays the brokers. Just like hedge funds annuities are an easy way to loose your money if you don’t know what you’re doing.
Of course there are still valuable annuities, older ones that have a high guarantee and good terms for adding money, or low-cost deferred annuities. In general watch out for management fees over 1 percent because they begin to reduce the value of your assets in a tax-deferred annuities. In higher tax states you might make decisions differently than others obviously a hedge fund with generous return could be taxed highly, however a tax deferred annuity could return much higher return.