Life Insurance Vs. Annuity: A Comparison

Shawn Plummer

CEO, The Annuity Expert

The difference between life insurance and an annuity is that life insurance pays the beneficiary money when the insured dies, and annuities give a retiree money every day while alive. Both products are often marketed as ways to delay or avoid taxes. But unfortunately, they also have high expenses that make investments less profitable. But did you know that annuities can offer consolation prizes for applicants too unhealthy to get approved for life insurance? Annuities can also provide life insurance for investors’ qualified retirement plans, such as an IRA or 401(k).

Are Annuities, Life Insurance?

Annuities and life insurance are financial products that serve different purposes. While they may seem similar at first glance, there are some essential differences to be aware of.

An annuity is a financial product that provides a series of regular payments over a set period of time. Annuities can be used to generate income during retirement, and they may be funded through a lump sum payment or a series of smaller payments made over time.

When you purchase life insurance, you are entering into a contract with an insurer to provide financial protection for your loved ones if something unexpected occurs. In addition, the policyholder is guaranteed that the insurer will pay out a designated death benefit amount upon their passing. Despite our best efforts, sometimes tragedy strikes, and this extra security can bring immense peace of mind during difficult times.

So, is annuities life insurance? No, they are not. While annuities and life insurance offer financial protection, they do so differently. Annuities provide a regular income stream over a set period, while life insurance provides a lump sum payment to named beneficiaries upon the insured’s death.

Annuities Vs. Life Insurance

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

Another distinction between annuities and life insurance is intended to guard you against premature death. On the other hand, annuities 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. Life insurance 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 cash/investment account growth 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—mainly if they can find low-fee providers and invest in them long-term.

High-income individuals sometimes park cash value policies inside irrevocable life insurance trusts to minimize their beneficiaries’ federal estate taxes.

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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 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 for 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 401k 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. Non-qualified 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).

Next Steps

Deciding whether or not to purchase an annuity is a personal decision that depends on your needs and goals. However, it’s essential to understand the difference between annuities and life insurance to make an informed choice about which type of product is right for you. If you have any questions about annuities or want a quote, please don’t hesitate to contact us. We’d be happy to help you navigate this complex topic.

Life Insurance Vs. Annuity: A Comparison

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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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