How to understand indexed annuities and life insurance
The amount of misinformation and misunderstanding in these two important areas of finance is truly mind-boggling. However, if you are looking for a great and safe investment without worrying about stock market loss and economic chaos, an indexed annuity might be the answer.
In order to understand the annuity concept, just think of the lottery. For example, let’s say someone won $50 million and he/she can get a lump sum of $30 million after taxes. Another option to get the full $50 million would be by stretching the payments out over several years. This is the principle of how annuities work.
The really good news is indexed annuities can not only avoid market risk, but all fees provided you follow the basics which can include waiting one year to begin withdrawing your money. Add on to this no current taxes, no probate (a legal process of validating a will for estate purposes) and outperforming the market itself over time and the picture is bright indeed. There are even companies that will credit up to a 10% bonus in your account up front, but it should be understood that this generally means keeping the account open for a longer period of time. All that said, there is simply no other investment like them.
With the recent sharp decline in the stock market/economy and the awful events with the current coronavirus, you might want to ask what happens if you have no money to invest? It’s still possible you might have some, and a good place to begin looking could be in your life insurance policy/policies.
All too often people buy one of the various forms of cash-value life insurance (universal, variable, whole life, etc.), not because they need such policies, but because some agent or “friend” sold it to them.
The key point here is never to mix your life insurance with investing (just think of oil and water: they don’t mix well either). If and when you need life insurance, the right kind is a low-cost term plan, and be sure to invest outside the policy.
Here’s an example to help illustrate this:
Suppose Walmart is selling a refrigerator (cash-value insurance) for $1,000 and Best Buy has the exact same one for $200 (term insurance). If you purchase the $200 one, you saved $800, which can also be used to invest.
With standard wholelife, if there is a death on the policyholder, the company will pay the face amount. But what happens to the cash value? Buying term and investing elsewhere allows you the maximum value of both. To summarize:
• Never mix your insurance with investing. If and when you need life insurance, buy a low-cost term plan.
• If you need money for investing or even living expenses, be sure to get an accurate reading of the cash value in your life insurance policies. It is generally not a good idea to borrow money against it because you are paying interest to borrow your own money. The dividends in your policy have also been defined as an overpayment of premium.
• If you like the stock market but are inexperienced or cannot afford losses (who likes losing money?) look to indexed annuities.
• Even if you never heard of the company, it could be because they don’t advertise much and they may still be well-rated.
• Knowledge is power, and we fear things we don’t know or understand. If you use simple logic and math with all your financial decisions, you can be a winner.