The Difference between Annuities and Life Insurance

Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.

Comparing deferred and immediate annuities

There are two main types of annuities-deferred and immediate-and two main types of life insurance-term and whole life.

  Life Insurance Annuities
  Term life Whole life Deferred annuities Immediate
annuities
Main reason for buying it Provide income for dependents Provide income for dependents or meet estate planning needs To accumulate money in a tax-deferred product To assure you don’t “outlive your income”
Pays out when You die You die, borrow the cash value or surrender the policy You make withdrawals One period after you buy the annuity, stops paying when you die*
Typical form of payment Single sum Single sum Single sum or income Lifetime income
Buyer’s age when it is typically bought 25-50 30-60 40-65 55-80
Accumulates money tax-deferred? No Yes Yes Yes, but only in the early payout years
Pays a death benefit? Yes Yes Yes *payments continue if the annuity has a guaranteed-period option that hasn’t expired at the annuitant’s death
Are benefits taxable income when received? No No, unless a cash value withdrawal exceeds the sum of premiums Yes, but only the part derived from investment income Yes, but only the part derived from investment income