Life Insurance and Annuities

The annuities can be classified as follows:

Immediate Annuities - These are purchased with a single premium. The income stream payment to the annuitant (i.e. annuitization phase) starts within one year of the purchase of the product.
Deferred Annuities - These products include an accumulation phase and an annuitization phase. As the annuitization phase happens in a future time, it is called "deferred". During the accumulation phase, the premiums (single or flexible) paid by the policyholder would grow with credited tax-deferred interest. Based on the different interest credited approach, the deferred annuities can be classified further into the following:
- Fixed Annuities - The credited interest rate is guaranteed with a minimum interest rate.
- Indexed Annuities - The credited interest rate is linked to an external index of investments, such as bonds or the S&P 500, but contains a minimum guaranteed interest rate.
- Variable Annuities - The credited interest rate is directly linked to stocks, bonds or other investments. Policyholders assume the investment risk.

Life insurance companies usually offer two types of products, life insurance products and annuity products. As the two types of products have different risks, mortality vs. longevity, having both can allow the company to better manage the risks. A life insurance product provides financial protection to loved ones should the insured die. An annuity product works as a retirement income vehicle. It provides a single income payment or an income stream in exchange for a single premium or multiple premiums paid by the policyholder.

This blog post shows general information on the main life insurance products and annuity products. In the market, there are a variety of sub-products under each product category. What is shown here is for your information only. It is not meant to provide suggestions as it really depends on the individual or family's needs. However, hopefully, the brief introduction could help you understand the context of each product category and explore your needs from there.

For more insurance information, you can visit the National Association of Insurance Commissioners (NAIC) website, https://content.naic.org/cipr-topics/life-insurance for life insurance and https://content.naic.org/cipr-topics/annuities for annuities. Some of the product information below also references the NAIC website.

Background

For life insurance, you would want to consider whether the need for the insurance is just for a period of time or for the whole life time, and whether it is for life insurance purposes only or whether you would consider investment as well. Below are the main products:

Term Life Insurance - Term life insurance provides life insurance coverage for a specified number of years. It is designed to purely cover life insurance, thus, it does not have a cash value or investment features. Due to this, it is cheaper than the permanent life products. The most common term life insurance is the level term products (typically for 10, 15, 20 and 30 years). The coverage amount and premiums are guaranteed to remain level during the specified period regardless of the insured's health status.
Permanent Life Insurance - Permanent life insurance provides insurance coverage for the entire life of the insured unless the policyholder stops paying the premiums or surrenders the policy or the cash value is not sufficient to keep the policy in force. There are two types of permanent life insurance. They are whole life and universal life. Each type has a variety of products. These products are more expensive than the term life insurance.
- Whole Life - This type of insurance provides a fixed amount of insurance coverage over the lifetime of the insured. It is designed to build tax-deferred cash value, which is the accumulation of collected premiums less applicable expenses and insurance charges. Policyholders can borrow loans against the cash value. The premiums paid by the policyholder can be a single premium or limited payments for certain years. Some whole life insurance provides dividends and some don't. The first is called the participating product (i.e. share in the insurer's investment, expense and mortality experience) and the latter is called the nonparticipating product.
- Universal Life - This type of insurance provides tax-deferred interest to the policy's cash account. The insurance coverage amount and the premiums can fluctuate at policyholder's discretion. The policy stays in force as long as the cash value is sufficient to cover the cost of insurance.
  - Some universal life products such as variable universal life and indexed universal life, include an investment component. The credited interest of variable universal life is linked directly to stocks, bonds or other investments and the return is not guaranteed. In fact, it could have a negative return (volatile with high risk). The credited interest of indexed universal life is linked to the external index of investments, such as bonds or the S&P 500. These index products provide guaranteed interest.