Annuities vs. Life Insurance: Which Is Right for Retirement Income?

Couple looking at map by camper van. Getty Images/Compassionate Eye Foundation/Andrew Olney

While annuities and life insurance both have similarities, they are not the same. Before you can understand the differences and determine which plan may be right for you relating to a retirement income plan, you have to first understand the key elements of each.

Life Insurance: Life insurance plans provide income for your dependents if you die sooner than expected. Most life insurance plans can be divided into either term-life or whole life insurance.

A term-life insurance policy covers a specific period of time, generally 10, 20 or more years, whereas the 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.

Many 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: Annuity plans are designed to provide retirement income to the plan owner if he lives beyond the expected lifespan. Annuities provide tax-deferred savings for retirement income. While the annuity does have a death benefit to beneficiaries, it is not tax-free. Annuities are generally referred to as deferred, immediate or longevity annuity plans.

  • Deferred Annuity: The deferred annuity is just as it sounds. The income is deferred after premiums are paid until a later date, perhaps several years. Deferred annuities are further broken down into fixed (traditional, Fixed Indexed (FIA) and the Variable annuity. 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 are looking for market-like returns with greater accumulation value potential.
  • Immediate Annuity: 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 to begin paying out no later than one year after the premium has been paid. This annuity plan is designed for people looking to a guaranteed income for life.
  • Longevity Annuity: A longevity annuity plan is a type of fixed-income annuity which can be issued at any age with income deferred up to 45 years. Typically, plans of this type do not plan 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 may be declining in its payout or have stopped altogether.

Which Plan Is Better?

The key in determining which plan is right for you — annuity or life insurance — is to look at your purpose. If your main purpose is to help your dependents and other beneficiaries pay for your final expenses, bills and have remaining money left to live on, your best bet is life insurance since this 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.

Both plans do 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 Can You Buy a Life Insurance/Annuity Plan for Retirement Income?

There are many reputable companies offering both life insurance and annuity plans. You can find a company either on your own or through your own insurance agent. If doing the search 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 A.M. Best and J.D. Power & Associates.