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Annuity vs. life insurance

These policies offer financial protection across all stages of your life.

Annuities and life insurance are often presented as an either/or choice. They both offer death benefits, but together, these insurance products provide coverage throughout your entire life.

Life insurance protects your family if you die during your working years, and an annuity provides post-retirement income. In the most basic terms, life insurance covers costs if you die too soon, and annuities make sure you don’t run out of money if you live a long time.

Features of annuities vs. life insurance

Compare the following benefits and drawbacks of investing in an annuity or life insurance policy:

FeatureAnnuityLife insurance
Death benefitcheckmarkcheckmark
Tax-deferred growthcheckmarkcheckmark
Riders availablecheckmarkcheckmark
Penalties for early withdrawalcheckmarkcheckmark
Loans against earningscheckmarkcheckmark
Income payments while alivecheckmark
Taxable benefitscheckmark

What is an annuity?

An annuity is a type of tax-deferred savings account set up with an insurance company. You pay into your account with either a lump sum or with payments over time, and your insurance company invests your money. Once your account matures, you can withdraw your earnings as income for your retirement.

If you die before your annuity payments are complete, whatever is left in your annuity account becomes a death benefit paid to your beneficiaries.

How does an annuity work?

Once you start paying into your annuity, your annuity grows based on the interest rate set by your insurer and the type of annuity you choose. Once you’re ready to receive payouts, you’ll get your money based on the payment option you choose when you purchase your policy.

Types of annuities

Each type of annuity determines how your money grows over time.

  • Fixed. This annuity offers a guaranteed minimum interest rate of growth and a fixed number of payments over a specified time span.
  • Variable. This type is slightly riskier, as your money is invested into a variety of securities and the interest you earn depends on how well the investments perform.
  • Indexed. Your annuity’s earning is tied to a stock index, such as the S&P 500, so your earnings are potentially higher than a fixed annuity, and more stable than a variable annuity.

Annuity payout options

Your payout options are set at the purchase of your policy and determine how you’ll receive your money.

  • Immediate. Payments start one year after you’ve paid the premiums. This is usually only an option for annuities purchased as a lump sum, and this type of annuity doesn’t pay out a death benefit. Your income ends when you die.
  • Deferred. You set the start of payments to a future date, such as after you turn a certain age.
  • Longevity. This option is designed for people who want their payments to begin when their other retirement payments diminish or run out, typically around 80 years old.

What is life insurance?

Life insurance provides financial help to your family when you die. As long as you pay your premiums on time, your insurance company will pay a lump sum benefit to your beneficiaries after you die. With some policies, you may also earn interest that can be used as collateral for a loan while you’re alive.

How does life insurance work?

Life insurance will either pay out to your beneficiaries if you die during a set term, like 20 years, or whenever you die if you have a permanent policy. There are two main types of life insurance to choose from:

  • Term life insurance. This type is the best option for people who only want coverage for a set period of time, such as 10, 20 or 30 years. You select the term, pay your premiums, and if you die while the policy is still active, your beneficiaries get a death benefit.
  • Permanent life insurance. This type of policy covers you for your entire life, as long as you pay your premiums. You’ll pay more in premiums for this type of insurance, because part of every payment goes toward growing the policy through investments. This means you can take out low-interest loans against the earnings of your policy while you’re still alive and possibly even withdraw those earnings to help with your bills, depending on the policy.

How do I compare annuities and life insurance?

Because annuities and life insurance provide coverage for different stages of your life, many people invest in both to bolster their long-term investment portfolios. But if you need to choose between the two, keep the following in mind:

  • Strength of your retirement portfolio. Annuities are designed to provide steady income after you retire. But if you feel like your retirement is adequate to last your whole life, regardless of how old you are when you die, you may not need the income security an annuity provides.
  • Living financial obligations. Both securities pay out a death benefit, but if you’re more concerned about covering your financial obligations while you’re alive, an immediate annuity may be the right choice for you.
  • Taxes and fees. Both policies come with fees, but annuities are known for high fees, including administrative charges, mortality and expense fees, and surrender charges if you make more withdrawals in a year than you’re allowed. In addition, the income you withdraw from your annuity is taxable as income, whereas your death benefit from a life insurance policy is only taxable if your estate is worth more than $11.58 million, the 2020 estate tax threshold.
  • Your age. People tend to want life insurance when they’re younger and looking to cover their income, mortgage and other living expenses should they die prematurely. Annuities are often purchased later in life when a person’s focused on a steady retirement income.

Compare life insurance

Name Product Issue age Minimum Coverage Maximum Coverage Term Lengths Medical Exam Required
18 - 60 years old
5, 10, 15, 20, 25 and 30 years
Compare 40+ insurers and apply online to get the lowest possible price — no medical exam required.
Policygenius - Life Insurance
18 - 85 years old
10, 15, 20, 25, 30 years
Depends on provider and policy
Compare 12+ top insurers side-by-side to get the best possible deal, and shop return of premium policies online.
18 - 60 years old
10, 15, 20, 25, 30 years
Get a quote in less than 10 minutes with on-the-spot approval and no medical exam.
Everyday Life
20 - 75 years old
10, 15, 20, 25, 30, 35 and 40 years.
Ladder multiple life insurance policies to save on the coverage you need for all your debts.
20 - 60 years old
10, 15, 20, 25 or 30 years
No, for coverage up to $3M
Apply for term life insurance online without the medical exam. Get an instant decision and adjust your coverage at no charge.
JRC Life Insurance
18 - 85 years old
10, 15, 20, 25, 30, 35, 40 years to lifetime/age 121
May be required
Compare policies up to $10 million from 45+ top insurance companies with the click of a button.

Compare up to 4 providers

Bottom line

Both life insurance and an annuity provide security and tax-deferred growth with relatively low risk. So, choosing between these policies or deciding to invest in both depends on your retirement goals and financial priorities. But before you apply for either, make sure to compare your life insurance and annuity options to make sure you’re getting the best possible coverage for your money.

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