The Difference between Life Insurance and Annuities

Life insurance and annuities are financial products designed to provide financial protection, but they serve different purposes. Life insurance offers a death benefit to beneficiaries when the insured person dies, while annuities provide a stream of income during retirement or another period you choose.

Understanding the difference helps you choose the right product based on your financial goals.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company that pays a death benefit to your beneficiaries when you pass away. It helps provide financial support to your loved ones by replacing income, covering debts, paying funeral costs, or preserving family financial stability.

There are several types of life insurance, including term policies and permanent policies, each offering different features based on your needs.

What Is an Annuity?

An annuity is a financial contract with an insurance company designed to provide you with a steady income stream, usually during retirement. You pay premiums into the annuity, either as a lump sum or over time. In return, the insurer pays you periodic payments based on the terms of the contract.

Annuities help you manage longevity risk — the risk of outliving your savings.

Key Differences Between Life Insurance and Annuities

Purpose of the Product

Life insurance provides financial support to beneficiaries after your death.
Annuities provide income to you, typically during retirement.

Payout Timing

Life insurance pays upon the insured’s death.
Annuities pay during your lifetime or for a specified period.

Beneficiaries

Life insurance benefits go to your designated beneficiaries.
Annuities pay you directly or a designated beneficiary after you die, depending on the contract.

Cash Value and Investment Features

Some life insurance policies build cash value you can borrow against.
Annuities focus on income and may have investment components, depending on the type.

Types of Life Insurance

Term Life Insurance
Provides coverage for a specific period such as 10, 20, or 30 years. It pays a death benefit if you die during the term.

Whole Life Insurance
Permanent coverage with a cash value component that grows over time and lasts your entire life.

Universal Life Insurance
Flexible permanent coverage with adjustable premiums and death benefit options.

Types of Annuities

Fixed Annuities
Provide predictable, guaranteed income payments.

Variable Annuities
Payments vary based on investment performance.

Indexed Annuities
Returns are linked to a market index but typically include a minimum guarantee.

How Life Insurance and Annuities Work Together

Some financial plans use both products:

• Life insurance to protect dependents or cover estate needs

• Annuities to provide stable income in retirement

Using both can create a comprehensive strategy that addresses death benefit protection and lifetime income.

Frequently Asked Questions

What is the main difference between life insurance and annuities?
Life insurance pays a death benefit to beneficiaries, while annuities provide income to you, usually during retirement.

Can life insurance build cash value?
Yes. Certain permanent life insurance policies build cash value you can borrow against or use during your lifetime.

Do annuities pay a beneficiary after death?
Some annuities pay remaining benefits to a beneficiary if the contract includes a death benefit feature.

Are annuities only for retirement?
Annuities are primarily used for retirement income but can be structured for other income needs or payout periods.

Is life insurance only for older people?
No. Life insurance is often purchased at younger ages to protect income and support dependents regardless of age.

Can one person have both life insurance and an annuity?
Yes. Many people use life insurance and annuities as complementary financial tools for both protection and income planning.

Final

Understanding the difference between life insurance and annuities helps you make informed financial decisions based on your goals, whether protecting loved ones or securing income in retirement. With over 30 years of experience, we help individuals evaluate options and choose the right financial protection strategies for their unique needs.

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