Over the past decade we’ve entered an environment of low interest rates on fixed income products, and because of that many advisors have looked to alternate sources of retirement income. Two products that have been used as alternatives to more traditional bond portfolios are annuities and life insurance.
When considering how we might produce income in our retirement understanding annuities and life insurance can be extremely important.
What do we know about annuities?
- Annuities can provide contractual guarantees on how much income can be produced for the life of a client, and potentially their spouse: annuities are a conservative route because the income is guaranteed, but comes with taxation of the income that is provided.
- In an annuity you do not have to prove your insurability: most clients fund an annuity in one single lump sum, which not everyone can do.
- In some cases an annuity can be the only way for an older individual to participate in these alternate strategies because they cannot accept investment risk and cannot afford the much higher life insurance premiums that come along with the old age.
What do we know about life insurance?
- By over funding, or putting more money annually into a life insurance contract to simply guarantee the death benefit, you can potentially get tax free income during a client’s lifetime.
- The income can be taken as a loan from the policy, which makes it tax free.
- The income amount is not guaranteed and is reliant on the returns of the stock market.
- More conservative life insurance policies will guarantee no loss in your policy due to the market, but will cap the potential gains.
Both strategies have a place, but things like age, insurability, and risk tolerance need to be taken into account to provide the appropriate solution.
Adam Smith, VP Product Development
Independent Agent: AR, WY 7472721
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