Life Insurance Vs. Annuity: A Comparison

Shawn Plummer

CEO, The Annuity Expert

Life insurance pays you money when someone dies, and annuities give you money every day during retirement.

Both products are often marketed as ways to delay or avoid taxes. They also have high expenses that make investments less profitable.

But did you know, annuities can offer consolation prizes for applicants too unhealthy to get approved for life insurance?

Annuities can also provide a form of life insurance for investors’ qualified retirement plans such as an IRA or 401(k).

Annuities Vs. Life Insurance

Annuities are not life insurance. Annuities are in essence the polar opposite of life insurance. The major aim of a life insurance policy is to establish an inheritance for beneficiaries by paying into a contract on a regular basis. In terms of avoiding probate, an annuity’s main function when it comes to estate administration is to liquidate an estate faster.

Another distinction between annuities and life insurance is intended to guard you against premature death. Annuities, on the other hand, are meant to safeguard you from living beyond your means and running out of money.

Annuities are insurance policies that help protect against losing your money during retirement or running out of money in retirement. Life insurance is insurance that protects the people you leave behind financially if you die.

Life Insurance

Life insurance protects your family financially if you pass away, and there are many types of life insurance policies:

With a permanent life insurance policy, any growth in the cash/investment account and investment gains are tax-deferred until the money is withdrawn, making spending more flexible.

Things To Consider

In addition to the upfront cost, policyholders must pay annual fees that can counteract the benefits of having money in tax-sheltered accounts.

It is often hard to find out how much the fees are. This makes it hard to compare companies.

Individuals who have maxed out their contributions to 401k or IRA retirement accounts may want to consider a cash value policy—particularly if they can find low-fee providers and invest in them for the long term.

To minimize their beneficiaries’ federal estate taxes, high-net-worth individuals sometimes choose to park cash value policies inside irrevocable life insurance trusts.

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Many people worry about not having enough saved for their retirement. Annuities were created to help families take care of these concerns. You purchase an annuity to secure future payments, either for a fixed period of time or an entire lifetime.

Things To Consider

Annuity products sometimes charge annual fees that can erode long-term gains. Annuity contracts charge high surrender fees canceling the contract too early.

Tax treatment is a concern. Earnings grow on a tax-deferred basis, but if you withdraw the funds before you are 59½ years old, any withdrawals will be subject to a 10% early withdrawal penalty.

Annuities may be the best choice for people with long lifespans. If someone is likely to reach the age of 90 or older, they will need money to pay for increased healthcare and long-term care costs. They might be getting money from their 401(k) and Social Security payments, but that might not be enough.

For young people investing, deferred annuities are great if they have already maxed out their 401(k) and IRA contributions. And if they want to shelter more money from taxes.

Non-Qualified vs. Qualified Annuities

Qualified annuities are retirement accounts funded with funds from before taxes. Nonqualified annuities are retirement accounts funded with funds already taxed.

Qualified annuity contracts are subject to the same rules as other investments in qualified retirement plans such as early withdrawal penalties or required minimum distributions (RMD).

Why you can trust The Annuity Expert

At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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