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Annuity vs. life insurance

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


Fact checked

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:

Life insurance
Death benefit
Tax-deferred growth
Riders available
Penalties for early withdrawal
Loans against earnings
Income payments while alive
Taxable benefits

What is an annuity?

An annuity is a type of tax-deferred savings account purchased through an insurance company that you pay into with either a lump sum or with payments over time. The company invests your money and you can withdraw your earnings as income for your retirement once the account matures.

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?

There are several types of annuities, each with its own set of risks and rewards. You can customize your annuity by determining how it earns interest and when it pays out. Choose from these earning types:

  • Fixed. This annuity offers a guaranteed minimum interest rate 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.

Choose from the following payment options:

  • 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 when you pass away. 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?

Insurers offer several policy options under two main types:

  • 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.
  • Whole life insurance. This policy covers you for your whole 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
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21 - 54 years old
10 or 20 years
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18 - 85 years old
10, 15, 20, 25, 30 years
Depends on provider and policy
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Everyday Life
20 - 75 years old
10, 15, 20, 25 or 30 years
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25 - 60 years old
10, 15, or 20 years
Depends on policy
Get affordable term life insurance with accelerated underwriting or no-exam coverage up to $1,000,000. Available in all states except CA, NY and MT.

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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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