Life insurance provides financial benefits to a decedent’s family or other designated beneficiaries, and may specifically provide for income to the insured’s family, burial, funeral, and other final expenses.
Life insurance policies often provide the option of having the proceeds paid to the chosen beneficiary either in a lump sum amount or through an annuity.
In most US states, a person may not purchase a policy for another person without their knowledge.
Annuities provide a stream of payments and are classified as insurance because they are provided by insurance companies, are regulated as insurance, and require the same types of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a certain benefit for life are sometimes considered insurance against the possibility that a retiree will outlive his or her financial resources.
In that sense, they are complementary to life insurance and, from an underwriting perspective, are considered a mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which can be withdrawn by the insured in the case that the policy is surrendered or they wish to borrow against it.
Some policies, such as annuities and endowment policies, are used as financial instruments to liquidate wealth when needed.
In many countries like the United States and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread utilization of life insurance as a tax-efficient method of saving and sometimes protection in the event of early, unexpected death.
In the US, the tax on this interest income from life insurance and annuities is generally deferred in most circumstances. However, in some cases, the benefit earned from tax deferral may be offset by a rather low return. This depends on the insurance company, the type of policy, and a number of other variables. Moreover, other tax-saving vehicles may be preferred as alternatives for cash value accumulation.
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