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While life insurance and annuities have similarities, they are not the same. Both can provide you with retirement income, but annuities may be a better choice for achieving this goal. Life insurance, on the other hand, is more commonly used to support your dependents and beneficiaries financially after you die.
Learn more about the differences between life insurance and annuities to find out which is right for you.
Key Takeaways
- Annuities are intended to benefit the plan owner, and benefits are paid out during the owner's life.
- The person who buys life insurance rarely sees those benefits—they're intended instead for heirs and dependents.
- Both annuities and life insurance come in several different types, and many companies offer both annuities and life insurance products, so it's best to shop around and find what works best for you.
What's the Difference Between Life Insurance and Annuities?
| Life Insurance | Annuities |
|---|---|
| Provides income for your dependents | Provide income to the plan owner |
| Paid out on the plan owner's death | Paid out during the plan owner's life |
| May be term or whole life insurance | May be deferred, immediate, or longevity annuity plans |
Purpose
Life insurance plans provide income for your dependents if you die sooner than expected. Some life insurance policies do offer cash value and income-earning options as well as other living benefits like a critical care coverage option. However, this is not the main function of a life insurance policy. Its main function is to care for your dependents after your death and pay for end-of-life/final expenses.
Annuity plans are designed to provide retirement income to the plan owner if they live beyond the expected lifespan. Annuities provide tax-deferred savings for retirement income.
Payout
If you have your own life insurance policy, you likely hope that you never actually see the payout. It's meant to be distributed to your beneficiaries only in the event of your death. It can help them with final expenses, debt, education costs, and more.
With an annuity, the plan owner does receive a payout while they are still living. While the annuity does have a death benefit for beneficiaries, it is not tax-free.
Types of Plans
Most life insurance plans can be divided into either term life or whole life insurance.
- A term life insurance policy covers a specific period. This is generally 10, 20, or more years.
- A whole life insurance policy is for the entire life of the policyholder.
Some term life insurance policies offer the option to be converted into a whole life insurance policy when the term expires.
Annuities, on the other hand, are generally referred to as deferred, immediate, or longevity annuity plans.
- The deferred annuity is just as it sounds. The income is deferred after premiums are paid until a later date—at least one year, but often longer. Deferred annuities are further broken down into traditional, Fixed Indexed (FIA), and variable annuities. The main differences in the types of deferred annuity plans are how the interest is earned and whether the individual is looking to make a safe investment or looking for market-like returns with greater accumulation value potential.
- The immediate annuity pays benefits starting no later than one year after you have paid your premium to the insurance company. Most immediate annuities are purchased with a one-time, lump-sum payment and are designed for beginning payments no later than one year after the premium has been paid. This annuity plan is designed for people looking for a guaranteed income for life.
- A longevity annuity plan is a type of fixed-income annuity that can be issued at any age with income deferred for years. Typically, plans of this type do not pay out until the holder is 80 years of age or older. Think of it as a supplemental pension plan that can kick in once your regular retirement plan declines in its payout or has stopped altogether.
Which Is Right for You?
The key to determining which plan is right for you—annuity or life insurance—is to look at your purpose.
Life insurance is your best choice if your main purpose is to help your dependents and other beneficiaries pay for your final expenses, bills and have money left to live on remaining. This option is passed on tax-free to your beneficiaries.
On the other hand, if you are looking for a plan that offers you a retirement income, then you should be considering annuities. This is because the annuity offers tax-deferred savings and retirement income. Simply put—life insurance protects your loved ones if you die prematurely, while the annuity protects your income if you live longer than expected.
Tip
Both plans can provide death benefits, but each is a very different option with different purposes. If you need guidance in deciding if a life insurance plan or annuity is right for you, consult a life insurance or annuity planning consultant to discuss all the options.
Where to Buy a Life Insurance or Annuity Plan
Many reputable companies offer both life insurance and annuity plans. You can find a company either on your own or through your insurance agent. If searching yourself, consider some of these top-rated companies offering both plans when comparing rates: AIG, Symetra, Sagicor, Americo, American Fidelity, New York Life, Bankers Life and Casualty, and more.
Be sure to check out the company’s financial strength ratings and customer service record with insurance rating organizations such as AM Best and J.D. Power & Associates.
The Bottom Line
If you're trying to choose between life insurance and an annuity plan, think about your main purpose for purchasing the plan. If you want to support your beneficiaries and other dependents financially after your death, life insurance might be right for you.
But if you're looking for additional retirement income, an annuity might be your best option.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Internal Revenue Service. "Publication 575 (2021), Pension and Annuity Income."
