Life insurance protects beneficiaries from the financial consequences of the insured dying too soon.
Annuities protect the insured from the financial consequences of living too long.
In both life insurance and annuities, the insurance company collects a premium and issues certain guaranties for the benefit of the insured or the beneficiaries of the insured. The insurance company invests those premiums in conservative instruments to grow those premiums dollars to assure that the company has the resources to satisfy the contractual guaranties they made to the insured when accepting the premiums.
There are some basic assumptions of facts that must be accepted to properly evaluate the benefits and risks of any type of insurance product or investment strategy.
- No one knows when you will die (or how long you will live.) Once you know when you will die it is too late to buy life insurance.
- No one knows what the stock market, real estate, gold, silver, or any other investment vehicle, will do tomorrow, next year or next decade.
- The past is not an accurate predictor of the future.
You, and I, deal in our individual environment. We are concerned with what happens to us, to our loved ones, to our investments, to our needs and resources. We make decisions on what is best for our situation.
The Insurance Company deals with the collective environment of all the policy holders. Some will die young, some will live extended lives. The larger the pool of policy holders the more accurate the assumptions can be about risk and investment returns. Insurance companies have actuarial staff that constantly update predictions on group mortality allowing the company to improve its accuracy in planning and preparation, based on “large” numbers.
The insurance company does not know how long you or I will live, but they do have statistical information about the average mortality of large numbers of people. This knowledge gives us confidence in knowing that the insurance company will be able to pay our claims when it is time, whenever that might be.
This is not an exhaustive discussion of life insurance or annuities. Both are tools with a wide array of applications when properly used in financial planning. For a detailed analysis and review of your financial situation and potential options, contact us for a thoughtful, no obligation review. Contact Us!