An annuity provides individuals with a guaranteed income source during retirement; it supplements the loss of income they experience when their career ends. It is often bought by individuals later in their career. On the other hand, life insurance is purchased earlier in life and is primarily meant for beneficiaries as protection should the policyholder pass away earlier than expected.
Understanding the difference between annuities vs. life insurance is crucial to deciding which to buy and when. By exploring the two investments, you can discover which one is best for you.
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What Is the Difference Between Annuities & Life Insurance?
Annuities and life insurance are two commonly-heard terms in long-term financial planning — but they have opposite purposes.
Annuities provide the buyer with a guaranteed income after retirement for the remainder of their life. That makes it the superior product when it comes to retirement planning.
Life insurance is meant for estate planning, or what you’ll leave behind to the ones you love. Term life insurance is typically the most popular choice, as it is an affordable way to protect dependents.
Explore the key differences between annuities vs. life insurance below.
Annuities vs. Life Insurance
- It offers guaranteed income for the rest of the buyer’s life after retirement and is typically bought later in life.
- It offers immediate or deferred payments. Immediate means within a year after purchase, while deferred means letting the earned interest on the principal balance grow for years.
- It is bought earlier in life and offers a lifetime of coverage.
- It includes a death benefit and a cash value component, which can grow and be withdrawn after a certain period of time.
- It is bought earlier in life and provides coverage for a pre-set period. Coverage ends after the period but can be renewed for another period, be it longer or shorter.
- It includes a death benefit only and is more affordable than permanent life insurance.
While annuities and life insurance are similar in that they provide a source of income, their function is differ.
Annuities replace or contribute to your income while you are living, whether this is due to retirement or being unable to sustain a job. That’s why an annuity is bought later in your career and does not have to be bought far in advance.
But the intention of life insurance is to provide financial assistance when you pass away to your dependent loved ones or beneficiaries. It is often bought early on in one’s career or life.
- FeatureAnnuitiesLife Insurance
Main
PurposeEnsures you have enough money
during retirement.Financially protects your family when
you pass away.Length of
CoverageProvides a guaranteed source of
income until you pass away.The policy lasts for a set period (term
life insurance) or until you pass away
(permanent life insurance).Death
BenefitPaid out steadily, be it
monthly or annually.The payment is in a lump sum, monthly
or annually, after you pass away.Cash Value
Can accumulate tax-deferred cash
value.Can accumulate tax-deferred cash
value (permanent life insurance) or not
(term life insurance).Dividend
EligibilityAnnuities do not pay dividends.
Can pay out dividends (permanent life
insurance only).
Should You Get an Annuity or Life Insurance?
Whether you get an annuity or life insurance will depend on where you are in life and what you need. If you are between 40 and 80 years old or are nearing the end of your career and want to secure a source of income after retirement, then an annuity is a good idea.
However, life insurance may be a better idea if you are a breadwinner aged 25 to 50 and have dependents, such as your parents, children or spouse.
You could also get both — life insurance to protect your dependents and an annuity for financial security when you retire.
Term life insurance is best for…
- Low- to middle-income breadwinners
- Mortgage holders
- Individuals who want affordable life insurance
Permanent life insurance is best for…
- High-income individuals
- Individuals who want to have coverage and investments at the same time
- Seniors who want their final expenses covered
- Individuals who have maximized other investment options
Annuities are best for…
- Middle-aged individuals preparing for retirement
- Individuals nearing retirement
- Seniors who need more income
- Individuals who have maxed-out other retirement income vehicles
If you’re looking to get life insurance but don’t know where to start, MoneyGeek analyzed the best life insurance providers based on their product offerings, customer satisfaction, financial stability and affordability. We also analyzed the cheapest life insurance providers based on the same metrics if you’re on a tight budget.
Survivor Annuities vs. Life Insurance
In the event of the death of an employee covered under the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS), their dependents are entitled to a survivor annuity. However, if you are looking to cover large expenses for the long term, such as mortgage payments, life insurance is a much better choice. That is because survivors' annuity payouts are not very large and cannot cover much more than general living expenses.
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Frequently Asked Questions
To understand the difference between life insurance and annuities, we’ve answered a few commonly asked questions below.
About Mark Fitzpatrick
sources
- U.S. Office of Personnel Management. "Deceased Employees Covered Under FERS." Accessed October 20, 2022.
- U.S. Office of Personnel Management. "Deceased Employees Covered Under CSRS." Accessed October 20, 2022.