The Difference Between Life Insurance and Annuities

Fixed annuities and life insurance policies are both purchased through insurance companies and may protect a lifestyle and future, but these financial products satisfy very different needs.

Generally, life insurance policies offer a death benefit to beneficiaries after the policyholder passes away; however, some types of life insurance may also include a savings component that can be accessed while the policyholder is alive. Conversely, instead of a death benefit, fixed annuities provide a pension-like stream of income that can help fund retirement.

In a fundamental sense, life insurance primarily benefits loved ones after a policyholder’s death; annuities are intended to provide regular payments to the policyholder.

Here are the key differences between life insurance and annuities:

• Beneficiaries: With annuities, the policyholder and, in some cases, a spouse are the primary beneficiaries, so they receive all income payments. With life insurance, a spouse, children or other designated individuals are the primary beneficiaries, so they receive the death benefit after the policyholder’s passing.
• Funding: Annuities are typically funded in one or more lump-sum payments to the insurance company. Life insurance policies are usually funded by premiums (e.g., monthly or annual payments) made over time.
• Payouts: Life insurance often pays the death benefit in one lump sum, whereas annuities typically pay benefits monthly over time; however, life insurance payouts may be adjustable in some situations.
• Purchase timing: Annuities are typically purchased later in life to provide additional income in retirement. On the other hand, life insurance is often purchased earlier when the death benefit protection (and potential savings component) may be more important to family and loved ones.
• Underwriting: Individuals must usually apply for life insurance coverage, and their acceptance is often based on factors like age and health. Underwriting is generally not required for an annuity.

Both life insurance and annuities can offer valuable financial benefits, but each policy has its own rules and considerations.

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© 2024 Zywave, Inc. All rights reserved. This Know Your Insurance document is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.