Life insurance and annuities both contract with insurance companies for long-term financial security. But the timing, purpose and beneficiaries differ.
Annuity vs. Life Insurance: Differences, Pros & Cons
Life insurance pays beneficiaries when you die. Annuities pay you during retirement.
Compare annuity vs. life insurance to decide which fits your financial plan.
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Updated: February 6, 2026
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Key Takeaways
Life insurance provides financial protection for your dependents after death through a death benefit payout, while annuities guarantee monthly income during retirement.
Life insurance requires health underwriting and medical exams for most policies. Annuities accept applicants without medical evaluations, focusing on age.
Both products can work together in a comprehensive financial plan. Life insurance protects your family if you die early, and annuities protect you from outliving your savings.
Annuity vs. Life Insurance: Key Differences
Payout Timing | Pays after death | Pays during lifetime |
Beneficiaries | Designated loved ones receive death benefit | Policyholder receives payments; some annuities include death benefit rider |
Purpose | Financial protection for dependents after death | Income security during retirement years |
Payment Structure | Lump sum death benefit or installment options | Monthly or annual income payments |
Underwriting Requirements | Medical exam and health questions for most policies; no-exam policies cost more | No medical underwriting; age restrictions may apply |
Funding Method | Regular premium payments (monthly, quarterly, annual) | Lump sum or series of payments |
Tax Treatment | Death benefit is generally tax-free to beneficiaries; cash value grows tax-deferred | Payments are taxable income; growth is tax-deferred |
When to Buy | Often earlier in life when premiums are lower and dependents need protection | Closer to retirement age for income planning |
What Is Life Insurance?
Life insurance offers financial protection for your loved ones. You pay premiums to an insurance company, and when you die, the insurer pays a death benefit to your designated beneficiaries.
The death benefit covers expenses your family can't afford without your income, including mortgage payments, credit card debt, funeral costs and daily living expenses. Your beneficiaries can use the money for any purpose.
Main Types of Life Insurance
Term life insurance covers you for a set period, usually 10 to 30 years. Premiums stay level during the term. When the term ends, coverage stops unless you renew at higher rates. Term policies cost less because they don't build cash value, and most expire without a payout.
Whole life insurance covers you until death, whenever that occurs. Part of your premium goes into a cash value account that grows at a guaranteed rate. You can borrow against this cash value or withdraw funds. Premiums stay fixed for life but cost more than term coverage.
Universal life insurance has flexible premiums and death benefits. You can increase or decrease coverage as your needs change. Cash value grows based on the insurer's current interest rates. Some months, you can skip premiums if your cash value covers the cost.
What Is an Annuity?
An annuity is a contract with an insurance company that converts a lump sum or series of payments into guaranteed income during retirement. You pay the insurer now, and the insurer pays you later for a set period or the rest of your life.
The insurance company assumes longevity risk. If you live to 100, you keep receiving payments even if you've collected more than you paid in. If you die early, the insurer keeps the remaining funds unless your contract includes a death benefit rider.
Types of Annuities
Fixed annuities guarantee a minimum rate of return, often between 2% and 5%. Your account grows at this fixed rate during the accumulation phase. When you start receiving payments, the amount stays the same each month.
Variable annuities tie returns to market performance through investment subaccounts you select. Returns aren't guaranteed. Your account can lose value if markets decline. Variable annuities cost more due to investment management fees and mortality expenses.
Indexed annuities track a market index, such as the S&P 500, but include caps and floors. If the index gains 15% and your cap is 8%, you earn 8%. If the index loses 20% and your floor is 0%, you earn nothing but don't lose principal.
Immediate annuities begin payments typically within 30 days to one year of purchase. You pay a lump sum and start receiving income almost immediately. Retirees use immediate annuities to create pension-like income streams. Once you buy an immediate annuity, you can't access the lump sum.
Deferred annuities delay payments until a future date, often 10 to 30 years away. Your money grows tax-deferred during the accumulation phase.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
Pros and Cons of Annuity vs. Life Insurance
Both products offer financial security but come with trade-offs. Compare the advantages and limitations to choose the right tool for your situation.
Pros and Cons of Annuities
Pros
Cons
- Guaranteed lifetime income protects you from outliving your savings
- Tax-deferred growth accumulates faster than taxable accounts
- No medical underwriting required regardless of health conditions
- Predictable payments help you budget retirement expenses
- Death benefit riders pass remaining funds to beneficiaries
- High fees reduce returns, especially on variable annuities
- Early withdrawal penalties before age 59½ plus surrender charges
- Payments count as taxable income at ordinary rates
- Inflation erodes purchasing power of fixed payments
- Beneficiaries receive no payout without death benefit rider
Pros and Cons of Life InsuranceProsCons
- Tax-free death benefit provides immediate cash to beneficiaries
- Term policies offer affordable coverage for specific periods
- Cash value in permanent policies grows tax-deferred
- Borrowing against cash value provides emergency funds
- Guaranteed death benefit regardless of investment performance
- Premiums increase with age and health conditions
- Term coverage expires worthless if you outlive the term
- Permanent policies cost three to five times more than term
- Cash value growth lags market returns in whole life policies
- Loans against cash value reduce death benefit if unpaid
When to Get an Annuity vs. a Life Insurance Policy
Choosing between these products can feel overwhelming, but your life stage and financial goals can help determine which product fits your needs. Some people need both, others need just one, and some need neither.
Choose an Annuity If:
You're approaching or in retirement.
Annuities convert savings into income streams. If you've accumulated retirement savings but worry about managing withdrawals, an annuity handles distributions automatically.
You worry about outliving your savings.
If you retire with savings that must last decades, annuities eliminate longevity risk through guaranteed lifetime payments.
Your Social Security doesn't cover basic expenses.
If your Social Security benefit falls short of covering your mortgage, utilities, food and healthcare costs, an annuity fills the income gap.
You've maxed out 401(k) and IRA contributions.
After contributing the maximum to tax-advantaged retirement accounts, annuities offer another tax-deferred growth option. No annual contribution limits apply to annuities.
You need predictable monthly income.
Fixed expenses like mortgages, property taxes and insurance premiums require steady income. Annuity payments arrive on schedule whether markets rise or fall.
Choose Life Insurance If:
You have dependents relying on your income.
Spouses, children or parents who depend on your paycheck need replacement income after your death. Life insurance provides funds to replace years of lost salary.
You want to leave a tax-free legacy.
Life insurance death benefits pass to beneficiaries without income tax, unlike retirement account withdrawals that face ordinary income tax.
You have debts.
Mortgage balances, business loans or cosigned student loans don't disappear when you die. Life insurance covers these financial obligations so your family doesn't inherit your debts.
You need coverage for end-of-life expenses.
Funerals and burial costs add up quickly. Your beneficiaries can use the life insurance payout to cover burial costs, memorial services and outstanding medical bills.
You're younger and can lock in lower premiums.
Younger applicants pay lower premiums for the same life insurance coverage amount. Buying early locks in lower rates for decades.
Can You Have Both Life Insurance and an Annuity?
Both products serve different needs in a complete financial plan. Life insurance protects your family from losing your income. Annuities protect you from losing your retirement savings through longevity.
You can own multiple policies of each type. Many people carry term coverage through work plus a personal whole life policy for permanent protection. Others split retirement savings between an immediate annuity for current income and a deferred annuity for future needs.
Work with a financial advisor to find out how much coverage you need. Too much life insurance wastes premium dollars. Too much annuity income locks up funds you might need for emergencies. Balance guaranteed income with liquid savings you can access anytime.
Annuity vs. Life Insurance Comparison: Bottom Line
Life insurance and annuities solve opposite problems with opposite timing. Life insurance pays your beneficiaries when you die, helping protect your dependents from lost income. Annuities pay you while you're alive, protecting you from outliving retirement savings. Life insurance requires medical underwriting to qualify, while annuities accept applicants without health evaluations.
Young families with mortgages and dependents prioritize life insurance. Retirees worried about running out of money prioritize annuities. Many people need both: term life insurance during working years to protect families, and annuities during retirement to guarantee income. The products complement each other in comprehensive financial plans.
This information is educational only. Consult with qualified financial and tax professionals before making insurance or annuity decisions.
Life Insurance vs. Annuity: FAQ
Can you cash out a life insurance policy like an annuity?
Permanent life insurance policies build cash value you can access through withdrawals, loans or surrendering the policy. Cash value grows tax-deferred, but withdrawals exceeding your premium basis face income tax. Policy loans don't trigger taxes but reduce your death benefit if unpaid at death. Surrendering your policy terminates coverage and generates taxable income on gains.
Term life insurance has no cash value, so you can't cash it out.
Which is better for estate planning, annuities or life insurance?
Life insurance fits estate planning needs because death benefits pass income-tax-free to beneficiaries. Estate planners use life insurance to cover estate taxes, equalize inheritances among children or leave charitable gifts. Annuities work better for generating retirement income than leaving an inheritance.
Can I convert my annuity into life insurance?
You can't convert an annuity into life insurance. To get life insurance, you must apply separately and pass underwriting. Some people withdraw annuity funds during retirement and use part of the income to pay life insurance premiums. Converting an annuity to cash to buy life insurance results in income tax on gains, so consult a tax professional before making changes.
Are annuities or life insurance better for retirement income?
Annuities are designed specifically for retirement income and convert lump sums into guaranteed monthly payments for life. Life insurance only provides retirement income indirectly if you choose permanent policies that build cash value you can borrow against or withdraw. Retirees needing a steady income choose annuities. Those wanting to leave an inheritance, plus access some funds during retirement, choose permanent life insurance.
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About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. He has analyzed the insurance market for over five years, conducting original research for insurance shoppers. His insights have been featured in CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
He writes about economics and insurance, breaking down complex topics so people know what they're buying.