Some insurance companies offer a “flexible premium deferred annuity” rider on their life insurance products at no additional cost. With this rider, you can plan for retirement while filling a life insurance need. Whether this rider is right for you will depend on your current and future life insurance needs and what other retirement plans you’re eligible for and already contributing to.
Flexible Premium Deferred Annuity
A stand-alone flexible premium deferred annuity is a retirement account similar to an IRA: You make regular contributions, pay no taxes on earnings until withdrawal and are usually penalized for withdrawing money before 59 1/2. You can increase or decrease contributions and, unlike in an IRA, the IRS does not limit your contribution. The annuity rider works in much the same way. If you choose this optional rider, you basically fund two needs--life insurance and retirement planning--with one premium.
Life Insurance Cut in Half
With an annuity rider, the life insurance death benefit may reduce or half after age 65 (or a company-set number of years) even though the premium remains constant. This is to maximize annuity growth later in the policy when the cost of life insurance and the need to fund retirement both increase. During the first year, your premium pays only for life insurance and does not fund the annuity. In the second year and thereafter, premium is split between the annuity and life insurance. You can opt to contribute more than the set premium to the annuity anytime.
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Rates of Return and Ratings
The type of annuities offered with life insurance are fixed annuities. Fixed annuities guarantee a minimum annual rate of return, such as 3 percent, and a higher “current” rate such as 5 percent. When you consider any guaranteed financial product, it’s imperative to look closely at the company’s financial ratings. Choose an independent ratings agency, such as Weiss Ratings, over other agencies that are paid by the insurance companies they rate.
This annuity rider may be suitable if you anticipate having less of a need for life insurance as you age, like the simplicity of paying one premium for essentially two financial products and need additional savings for retirement. If you’re eligible for a Roth or traditional IRA, consider contributing to one before you purchase any annuity--rider or stand-alone.
Life insurance companies regularly update their products and in the future may offer an annuity rider where the life insurance death benefit stays constant. For now, you can accomplish this by purchasing an annuity and life insurance policy separately.
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