Your Health Impacts Life Insurance and Life Annuities Differently

Both life annuities and life insurance serve as important tools in retirement planning. When considering either, recognize how insurance companies view the relevance of your health to the risk of offering these two products product types.

In a way, an annuity is the reverse of a life insurance policy. Life insurance insures you against the risk of dying too soon with the benefit of supplying money to replace your income needed by your dependents. An annuity protects you against the risk of living too long with the benefit of supplying income to you as long as you live so you will not run out of money while you are still alive.

The risk that the insurance companies take to supply benefits is whether or not the premiums (i.e. contributions) you pay them will cover those benefits. These risks are based on the projected life expectancies of their clients–i.e. those they insure.

In a life insurance contract, the insurance company risks that the insured person will die earlier than expected, thereby requiring the company to pay out benefit money to you before it receives from you sufficient premiums with earnings to pay that benefit. For an annuity, the company’s risk is that the annuitant lives beyond his life expectancy–requiring it to pay out more than it received from your contributions and their earnings.

Insurance companies handle the life expectancy risk of clients by spreading this risk over many clients with reliable statistics on when those clients will die. Life insurance companies need to know something about their clients’ health, so the life expectancy statistics they use are appropriate to those clients. If only sickly people signed up for life insurance, the company would go broke if it expected these people to die at a normal age.

So expect health questions when you apply for life insurance. If you do have some health problems, you may have to pay higher premiums to account for the higher than average risk of early death you pose for the company.

Annuity companies, on the other hand, are generally not concerned with clients’ health since they are not a risk if you die early. That’s profitable for them. Your health is not critical here as it is for life insurance.

There is a risk also that these companies will not get the return on its investment earnings from your premiums and contributions that they planned. In that case, they may not have the money to pay out benefits when they come due. This may be due to mismanagement, lack of reserves, and lack of a strong client base.

So, buy an annuity or life insurance only from a financially strong insurance company.

Give us a call 27331213 or email andrew@yourseniorfinances.com so we can show you annuity and life insurance options suitable for your situation.

Note: Note that annuities once annualized cannot be surrendered for value. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable.