A sound financial plan should always begin with the building of a solid, safety foundation for protection against the unexpected. It should include a 12 month emergency fund to protect against job loss or short term disabilities. It needs to have insurance protections against property loss, and, of course against the possibility of dying too soon. But what about the risk that more and more people are facing? That is the risk of living too long? For that reason, annuities should have a place in the safety foundation right alongside life insurance.

Life Cycle Protection

When it comes to life, no one can predict the future, but we do know that it is full of the unexpected, which is why it is important to build a safety foundation. No one expects to die too soon, but because the possibility exists, most responsible people insure their lives so that the capital will be available for their loved ones to carry on.

Conversely, living a long life is becoming more of an expectation, especially for the healthy among us. And, with life expectancies expanding each day, many people can see themselves living beyond the ages of their parents which are stretching well into the late seventies and early eighties. Yet, relatively few people are prepared, financially, to make their incomes stretch as far as their expected age. A recent survey of Baby Boomers reveals that less than 25% of them feel as though they have the means to live out their life expectancies.

Most people realize the life insurance is an essential component of their financial plan, because, if they or another breadwinner die too soon, they will not have accumulated the capital needed to provide for all of their families’ needs and obligation. And, for that, life insurance is the only viable tool. As people look out over their retirement time horizon and realize that they may not have the means to make their income last as long as they do, they will need to turn to annuities as the only viable tool that can ensure that their income will not run out.

Life Insurance to Create Capital

Life insurance is used as a creator of capital that becomes available at the moment the surviving family needs it most. It is most essential in the early stages of a family before enough time has passed to be able to accumulate their own savings. Annuities are a capital preserver which becomes increasingly important to people as they age. Without the ability to earn or accumulate more capital, it is vital that they be able to keep what they have and make it last.

Most people are aware of how life insurance works. In exchange for a premium, a life insurer promises to pay a death benefit to a named beneficiary. The amount of premium paid is based on the current age and health condition of the insured, and it is calculated to pay the risk costs of the death benefit that the insurer is obligated to pay.

Annuities to Preserve Capital

Annuities may be somewhat of a mystery to many people. As a form of insurance, they are also issued by life insurance companies. They are used when someone has a lump sum of capital they wish to preserve for future use, or as a source of income. In exchange for the lump sum of capital, the insurer promises to preserve the principal while making periodic payments for a term specified or for the life of the individual. The payments, consisting of both the principal and earned interest, can either be fixed, or tied to an inflation index, and they are calculated to be fully paid out by the end of the specified term of the individual’s life expectancy. Should the individual live beyond his or her life expectancy, the life insurer is obligated to continue to make the payments.

Annuities can also include a savings component that enables investors to defer their income into the future, and accumulate their capital, earning fixed or variable rates of return on a tax deferred basis. As an insurance contract, these deferred annuities include a death benefit that protects the principal for the beneficiaries in the event of a premature death.


If you look at your financial plan as a life cycle plan, where the different stages of life present different kinds of risk, the safety foundation you build should have the components needed to protect against each risk. For most people with young families who have yet to accumulate their capital, life insurance is a must. For older people, who are approaching the time when their accumulated capital needs to provide for them, capital preservation becomes the more critical objective. When they are a part of the safety foundation, annuities help retirees complete the cycle of life with the security of a lifetime of income.

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