Annuity vs. Life insurance: What’s the Difference – Annuities and life insurance meet different life needs, but both are offered by insurance firms. Annuities give a steady stream of income while you or your family is alive, whereas life insurance pays you cash after the insured person dies.
However, certain life insurance policies allow you to save while alive, and annuities may contain a death benefit payment. This article will examine Annuity vs. Life insurance: What’s the Difference?
What is an Annuity?
An annuity is a contract between you and a life insurance company that guarantees a series of regular payments in exchange for the premiums you pay. Annuities are intended to help you achieve specified goals, such as increasing your savings and providing income in retirement. An annuity can be purchased in one large sum or over time, and payments are normally made every month. Annuity payments are taxable as salary income in the year they are received.
How Does an Annuity Work?
You can get paid monthly, quarterly, semi-annually, or annually. Your annuity income is computed when you buy the annuity. Once you purchase an annuity, you cannot change it. Your regular payment amounts are locked in and cannot be changed for any reason.
Pros and cons of an Annuity
Pros
- You can select which features are crucial to you and only pay for those. That could entail selecting a certain level of income, investing more significantly in the stock market, or establishing a predetermined distribution for your heirs when you die.
- Peace of mind. An annuity can provide the equivalent of a personal pension, so you won’t have to worry about withdrawing too much (or too little) from your savings each month.
- Tax-deferred growth. Any increase in the value of an annuity’s holdings (stocks, bonds, etc.) is tax-free until payments commence in retirement.
- Guaranteed income. Based on how much you spend and are prepared to pay in fees, you can select a fixed level of income from an annuity, as well as gradual increases to keep up with inflation.
Cons
Annuities are complex and personalized. If you are unfamiliar with all of the terms of your specific annuity arrangement, you may encounter unpleasant surprises in retirement.
- Because annuities are so sophisticated, financial advisors receive larger commissions—sometimes as high as 8%. Depending on how the annuity’s costs are structured, the annuity investor may begin retirement without a significant portion of their assets.
- Most annuities have higher maintenance and operational fees than comparable mutual funds. On top of those charges are the fees associated with your chosen contract riders, which include many of the assurances you select.
- For the first several years (and sometimes longer), an annuity owner must pay significant surrender costs to withdraw more money from the annuity than the agreed-upon payments.
What is Life Insurance?
Life insurance is a contract between you and the insurance company. In exchange for your premium payments, the life insurance company will pay a lump sum known as a death benefit to your dependents after you die, as long as your policy is active. If you have permanent life insurance, it may include a cash value component.
How does Life Insurance Work?
Life insurance works by paying a death benefit to your beneficiaries if you die, but only if your policy is active at the time of your death—that is, you have paid the required premiums while you were living. The death benefit can be used for whichever purpose your recipients want. Before you sign a life insurance contract, the firm will calculate your premiums.
What Does Life Insurance Cover?
Life insurance normally covers all causes of death except suicide within the first two years of the policy. This means that all of these causes of death, among others, are covered:
- An accident, such as a vehicle collision
- Heart attack or disease
- Homicide (unless the insured is killed by a beneficiary).
- Illness
- Old age.
- War or terrorism
What Does Life Insurance Not Cover?
Life insurance policies are subject to certain terms and conditions for various types of deaths. Here is an insight into the various types of casualties that your life insurance policy may not cover:
- Due to driving while intoxicated (under the influence of alcohol).
- Because of a pre-existing medical condition
- Due to a car collision while driving under the influence of drugs
- As a result of engaging in adventurous activities or sports.
- Due to involvement in competitive racing or speed events.
- Due to pregnancy and childbirth.
- Due to involvement in any unlawful activity.
In addition, your life insurance policy may contain further exclusions. For example, if you smoke, you must declare it when acquiring a life insurance policy.
Annuity vs. Life Insurance: What’s the Difference
The main difference between annuities and life insurance is that life insurance provides for an individual’s loved ones after death. Annuities accept upfront contributions and convert them into future income, with the option of guaranteed income for life.
The table below depicts the differences between these two home insurance policies.
| Annuity | Life insurance |
| Pays when you die | Pays throughout your lifetime. |
| Provides your beneficiaries with a tax-free death benefit when you die. | Provides taxable income for your lifetime (or future beneficiaries when you die). |
| Payment is issued following the death of the insured. | Payments may stop upon the death of the policyholder, depending on the insurance options. |
Provides death benefits automatically | The death benefit ride is optional. |
| grows tax-deferred | grows tax-deferred |
These distinctions might help you evaluate which insurance coverage is appropriate for your needs. It also demonstrates which of this home insurance coverage is most suited to a specific case.