In retirement planning, distinguishing between annuities and life insurance can be confusing — both products can provide financial security, but they serve distinct purposes and function differently. Understanding their nuances is essential for making informed decisions about your future.

Explore the differences between an annuity versus life insurance and learn how they complement each other for a well-rounded retirement strategy.

{{key-takeaways}}

What’s an annuity?

An annuity is a financial product that turns your savings into regular guaranteed income payments. When you buy an annuity, you pay an insurance company either a lump sum or multiple contributions. In return, the insurer sends you regular payments for a set time or the rest of your life. Those payment amounts depend on the type of annuity and the particular terms of your contract. Some annuities also involve a beneficiary.

These are the primary annuity types from which you can choose:

• ‍Fixed annuities provide a guaranteed minimum interest rate, ensuring stable returns regardless of market fluctuations. Some fixed annuities also offer options that protect against inflation, preserving your purchasing power over time.
• ‍Variable annuities offer the potential for higher returns by linking your earnings to the performance of investments, such as stocks and bonds. However, this also means they come with higher risk, as the value of your annuity can fluctuate based on market conditions.
• ‍Indexed annuities tie your returns to the performance of a market index, such as the S&P 500. While they provide more growth potential than fixed annuities, they also limit your gains to a certain percentage of the index's performance, protecting you from large market losses but capping your upside potential.

‍

What’s life insurance?

Life insurance is a financial safety net that ensures future support for your loved ones. It functions based on a contract between you and an insurance company: You pay regular premiums, and the insurer guarantees a payout to your chosen beneficiaries when you pass away.

The key components of life insurance plans are:

• Death benefit: The lump sum paid to beneficiaries upon the policyholder’s death.
• Premium payments: Regular costs required to maintain coverage.
• Policy term: The duration of coverage, which varies by policy type.
• Beneficiaries: The individuals who receive the payout.

The two primary types of plans are term life and permanent life. Term life insurance covers you for a set period (like 10, 20, or 30 years). It’s an affordable choice since it doesn’t build cash value, but coverage ends when the term expires unless renewed. Alternatively, permanent life insurance covers your whole life and involves a cash value that grows over time. While you’ll pay higher premiums for these plans, you can borrow against the cash value or use it as an investment.
‍

What’s the difference between life insurance and annuities?

While both life insurance and annuities play key roles in retirement planning, they serve opposite purposes. Life insurance provides financial protection for your loved ones if you pass away early, offering a payout to help cover expenses. Annuities, on the other hand, help secure your own financial future by providing a reliable income stream in retirement. In many cases, annuities can also be structured to provide ongoing benefits to beneficiaries, ensuring financial support for both you and your family.

Here’s a breakdown of their core differences.

Life insurance

Life insurance is designed to provide a death benefit to your beneficiaries, offering financial protection if you pass away unexpectedly. You pay premiums, and in return, the insurer gives your loved ones a payout. The primary function of these plans is to safeguard against the financial impact of premature death.

Annuities

Annuities, on the other hand, are intended to provide income for the policyholder. You pay a lump sum, and the insurer distributes regular payments, securing financial stability throughout retirement. The main risk annuities protect against is outliving your savings when you stop working.

‍

How do annuities and life insurance function differently?

Beyond their differences in purpose, there are several key functional and logistical distinctions between annuities and life insurance. Here’s a closer look at where they diverge.

Payment options

Life insurance requires you to pay regular premiums to keep your coverage, and annuities offer more payment flexibility. You can either pay a one-off amount or make regular contributions to your account over time.

Tax implications

Life insurance and annuities are taxed differently — life insurance death benefits are typically tax-free for beneficiaries, while some annuities grow tax-deferred. This means you won’t pay taxes on your earnings until you withdraw funds, which are then taxed as regular income. These differences affect how each product accumulates value and the ways you can access your money.

Health underwriting

Approval for a life insurance policy usually requires a thorough medical review, including health exams and a detailed history, to determine your specific eligibility and rates. Annuities, on the other hand, involve minimal-to-no health requirements, making them a more accessible option for individuals with medical concerns.

Timeframe

Life insurance provides coverage for either a set period (term life) or an entire lifetime (permanent life), depending on the policy. Annuities give you more flexibility around when you’ll start receiving payments, whether you choose to start immediately or set a future date.

{{inline-cta}}

How to choose between an annuity and life insurance

Choosing between buying an annuity or a life insurance policy comes down to your specific circumstances and financial goals — one product isn’t inherently better than the other. Here are some factors to consider when weighing your options.

When to choose an annuity

If the following conditions apply to you, buying an annuity might be a great choice:

• You need a guaranteed income stream: An annuity is a strong choice if you want reliable retirement income. Fixed annuities, specifically, often provide steady payments regardless of market conditions, creating a pension-like income that can last a lifetime.
• You prefer a low-risk option: Fixed annuities are ideal for conservative individuals. Since the insurance company assumes the market risk, your returns are guaranteed, and your money has the most protection from market fluctuations.
• You want to maximize long-term growth: Deferred annuities offer tax-deferred growth, meaning your earnings accumulate without immediate taxation. Over time, this can lead to higher after-tax returns compared to taxable options.

When to choose life insurance

If you align with these circumstances, life insurance could be a preferable option:

• You want to ensure financial security for your family: Life insurance provides a greater level of financial protection for your loved ones when you pass away, covering future living costs and emergency expenses. While some annuities can offer financial support to beneficiaries, they typically require specific riders or payout structures, whereas life insurance is designed specifically to provide a lump sum benefit to your family.
• You want to minimize estate taxes: Life insurance can reduce the tax burden on your estate, ensuring more of your wealth goes directly to your heirs.
• You have significant debt to cover: Death benefits from life insurance can help your family pay off your remaining debt, such as a mortgage or loans, so they’re not left with those financial burdens.

‍

FAQs

Do annuities pay a death benefit?

Yes — many annuities include a death benefit. The payout structure depends on your contract and may provide a lump sum or continued payments to your beneficiaries.

Can I have an annuity and a life insurance policy?

You can purchase both products, and combining them can strengthen your financial plan. This approach:

• Provides lifetime income and financial protection for your loved ones
• Helps transfer wealth in a tax-efficient way
• Adds flexibility to your retirement planning
• Provides financial security for you and your beneficiaries

Is life insurance an annuity?

Life insurance and annuities are two distinct financial products that serve different purposes. Life insurance provides a payout to your beneficiaries when you pass away, while an annuity gives you regular income, typically during retirement.

Is an annuity a life insurance policy?

An annuity isn’t a life insurance policy. An annuity provides income during your lifetime, helping you manage retirement expenses. Life insurance, on the other hand, is designed to offer financial support to your beneficiaries after you pass away. While some annuities include death benefits that provide money to beneficiaries, they typically require specific riders or payout options.

‍

This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.