Life Insurance vs. Annuity: What’s the Difference?

When planning for your financial future, you may consider options such as life insurance or an annuity. Both products are offered by insurance companies and can play different roles in a broader financial strategy. In general, life insurance is designed to provide financial support to beneficiaries after the insured’s death, while an annuity is intended to provide income to the contract owner, often during retirement. Here's what you may want to know about life insurance vs. annuity so you can decide whether they're right for you:

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What is life insurance?

Life insurance is a policy that can financially help protect your partner, children, or other loved ones. As a policyholder, you’ll pay a monthly or annual sum to the insurer called a premium. Then, after you pass away, the insurer pays out a death benefit of a predetermined amount to your beneficiaries.¹ Your loved ones can use the life insurance payout to help cover funeral costs and pay unexpected expenses. There are many different life insurance policy types that may be at your disposal, including:

Term life insurance

Term life provides coverage for a limited period of time, such as 10 or 20 years. If you pass away within the policy’s term, your named beneficiaries receive the death benefit.² Term insurance typically has more competitive premiums compared to permanent life insurance plans.

Whole life insurance

Whole life insurance is a type of permanent insurance that provides lifetime coverage, as long as premiums are paid. Whole life insurance may have higher premium, but could accumulate cash value over time to borrow or withdraw from as needed.³

Variable life insurance

Variable life insurance is a permanent policy with fixed premiums and a minimum guaranteed death benefit. The policy has a cash value component, which you can invest in mutual-fund-like subaccounts. This investment element means that the cash value may grow or decrease based on the market.⁴

Final expense insurance

Also known as burial insurance, final expense insurance can help cover end-of-life expenses like a funeral service, medical bills, and burial expenses that may be left to your family after your passing.⁵ This payout may not be comparable to what other permanent life policies offer.

What is an annuity?

An annuity is an agreement between you and an insurer where they may provide you with a monthly or annual income in exchange for periodic installments or a lump sum payment you make. Annuities are often used as a way to supplement income during retirement, helping provide a steady and reliable cash flow over time.

Depending on the type of annuity you choose, you may receive payments for a fixed number of years or until you die. Annuities grow on a tax-deferred basis and are backed by the insurance company's ability to pay claims. Your annuity payments include not only your original lump sum or premium, but also accumulated interest.

Annuities can be used as part of a strategy to maintain your lifestyle even after retirement. Here are some common types of annuities:

Fixed annuity

A fixed annuity may be the safest option and is a great choice for anyone seeking predictability.⁶ Fixed annuities provide guaranteed returns on your premiums. We recommend consulting your financial advisor to discuss your best options.

Income annuity

An income annuity provides a fixed monthly benefit that may last for your entire life or a specific period. You can request payments immediately or at a later stage.

Variable annuity

Variable annuities tend to be riskier than fixed annuities, but they can also offer greater potential for growth. Your premiums are invested into stocks, bonds, and money market accounts. If these investments perform well, the return can be great, but keep in mind that poor investment performance may result in lower payouts.⁷

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Life insurance vs. annuity

Here are the main differences between life insurance and an annuity:

Death vs. life payouts

Annuities are paid out during the annuitant’s lifetime, while life insurance is paid out to beneficiaries once the policyholder has passed away.

Beneficiaries

Life insurance beneficiaries can be your children, partner, dependents, or a charitable organization of your choice. On the other hand, you are the primary beneficiary of your annuity. But it’s important to note that some annuities have a death benefit provision, which means a beneficiary named by the annuitant would receive the remaining payouts after the annuitant passes away.⁸

Form of payment

Since annuities are intended to last years, many people usually receive them as monthly payments. On the other hand, beneficiaries can decide how they want to receive a life insurance payout. Lump sum payments are common, but your loved ones can also choose to be paid in annual installments to prevent the death benefit from running out too quickly.

Time frame

As life insurance and annuities serve different purposes, people may choose them at different stages in life. Life insurance premiums are typically more competitive when policyholders are young and healthy. Life insurance may also make sense when you have dependents relying on your income, such as a partner or children. Annuities, however, are often purchased by older individuals, especially those approaching retirement age. It’s less common to purchase an annuity early in life.

Whether benefits are taxable

Life insurance death benefits are generally not taxable. Annuities and life insurance both grow on a tax-deferred basis, but with annuities, you’ll pay taxes on your payouts. The amount of taxes you’ll owe can depend on several factors, such as the annuity’s payout structure.⁹

Why consider Life Insurance vs. annuity?

Here are a few reasons to consider getting life insurance:

Helps with expenses: Life insurance offers added financial security to your dependents and can help them after your passing.
Legacy: Having life insurance can be a great way for you to leave a legacy for your children after you pass.
End-of-life costs: Funerals can be a major expense for the surviving partner or family. The life insurance death benefit payout can help them cover this cost and other end-of-life expenses.
Debt management: The payout from life insurance can help your loved ones pay off any debts you may leave behind, such as a mortgage or business loan.
Cash value: Permanent life insurance offers a flexible cash value component you can borrow from as needed.

Annuities also have excellent benefits, including:

Maintain your lifestyle: Annuities may enable you to maintain your lifestyle even when you retire from your job.
Reduce financial stress: An annuity can be a predictable means to continue your standard of living. This can help reduce financial stress and the risk of outliving your savings.
Reduced investment risk: People who choose low-risk options like a fixed annuity are essentially shifting the investment risks to the insurance company. This makes fixed annuities a safe option even for risk-averse individuals.
Tax-deferred growth: Structured to grow on a tax-deferred basis., but tax considerations can be complicated. Consult with a professional for details.⁷

Should I have life insurance and an annuity?

Life insurance enables you to provide help for loved ones, while an annuity helps you financially even after you retire. It can be smart to have life insurance and an annuity since each product offers a distinct form of added financial protection. Be sure to consider your financial goals, budget, and needs when deciding whether both financial products are right for you.

Consider a life insurance policy from Aflac

There are several differences between life insurance and annuities, and both products can help provide financial security. If you're looking for life insurance, Aflac offers several policies that can help give you and your loved ones added peace of mind. Our term life insurance policies can give you temporary coverage with competitive premiums, and our whole life plans will help cover your for life, as long as premiums are paid. Learn more about life insurance options from Aflac and get a quote today.

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