How are annuities different from life insurance?

Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.

 

There are two main types of annuities—deferred and immediate—and two main types of life insurance—term and whole life. The chart below compares them.

 

Main types of life insurance

 

There are two main types of annuities-deferred and immediate-and two main types of life insurance-term and whole life. The chart below compares them.

 

Life InsuranceAnnuities
Term lifeWhole lifeDeferred annuitiesImmediate
annuities
Main reason for buying itProvide income for dependentsProvide income for dependents or meet estate planning needsTo accumulate money in a tax-deferred productTo assure you don’t “outlive your income”
Pays out whenYou dieYou die, borrow the cash value or surrender the policyYou make withdrawalsOne period after you buy the annuity, stops paying when you die*
Typical form of paymentSingle sumSingle sumSingle sum or incomeLifetime income
Buyer’s age when it is typically bought25-5030-6040-6555-80
Accumulates money tax-deferred?NoYesYesYes, but only in the early payout years
Pays a death benefit?YesYesYes*payments continue if the annuity has a guaranteed-period option that hasn’t expired at the annuitant’s death
Are benefits taxable income when received?NoNo, unless a cash value withdrawal exceeds the sum of premiumsYes, but only the part derived from investment incomeYes, but only the part derived from investment income