Life Insurance vs. Annuity: What's the Difference?

Your purpose for buying the plan will help you decide which is right for you

Older couple looking at map by a camper van and enjoying their retirement.
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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.

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 in fact receive a payout while they are still living. While the annuity does have a death benefit to 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: traditional, Fixed Indexed (FIA), and variable annuities. The main differences in the types of deferred annuity plans are in how the interest is earned and whether the individual is looking to make a safe investment or is 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 out 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 is declining 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. 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 for 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.