Annuities vs. Life Insurance: What’s the Difference & Which One Should You Get?

Both annuities and life insurance are important for any financial plan — but there are key differences between the two. Annuities give you a fixed payout stream after a certain age. On the other hand, life insurance only pays if you surrender your policy, borrow the cash value or after your death.

Advertising & Editorial Disclosure
Last Updated: 11/13/2022
Edited By     |  
Written By     |  

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.

Table of Contents
Insurance Rates

Compare Life Insurance Rates

Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.

widget-location-pin

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

Annuities
  • 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.
Permanent Life Insurance
  • 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  • It includes a death benefit and a cash value component, which can grow and be withdrawn after a certain period of time.
Term Life Insurance
  • 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.

  • Feature
    Annuities
    Life Insurance
  • Main
    Purpose

    Ensures you have enough money
    during retirement.

    Financially protects your family when
    you pass away.

  • Length of
    Coverage

    Provides 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
    Benefit

    Paid 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
    Eligibility

    Annuities do not pay dividends.

    Can pay out dividends (permanent life
    insurance only).

  • Riders

    You can add riders, depending on
    the provider.

    Riders are available on term and
    permanent life insurance policies and
    may vary by provider.

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.

  • This is an icon

    Term life insurance is best for…

    • Low- to middle-income breadwinners
    • Mortgage holders
    • Individuals who want affordable life insurance
  • This is an icon

    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
  • This is an icon

    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
tip icon
MONEYGEEK EXPERT TIP

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.

Insurance Rates

Compare Life Insurance Rates

Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.

widget-location-pin

Frequently Asked Questions

To understand the difference between life insurance and annuities, we’ve answered a few commonly asked questions below.

About the Author


expert-profile

Mark Fitzpatrick is a senior content manager with MoneyGeek specializing in insurance. Mark has years of experience analyzing the insurance market and creating original research and content. He graduated from Boston College with a Bachelor of Arts and Johns Hopkins University with a Master of Arts.


sources