What’s the Difference Between Life Insurance and Annuities?
Two smart moves, two different goals.
You’ve heard life insurance and annuities can be beneficial for creating and maintaining a long-term financial plan. But what are they—and what’s the difference? Let’s get right to it:
Life insurance: Provides money to your beneficiaries when you’re not around to care for them. You would typically purchase these policies during life’s major milestones—getting married or having kids, for example.
Annuities: Allows you to grow your earnings that you can spend during your retirement. Typically, you’d use an annuity as a tool to help reach long-term financial goals, so you don’t outlive your income.
While both help provide financial security for you and your loved ones, it’s important to note you can’t use them interchangeably. To determine which one is right for you, first understand the key elements of both life insurance and annuities:
How life insurance and annuities work
- Term life insurance: Provides coverage for a specific period, often to help protect a young family.
- Whole life insurance: Locks in a lifetime of coverage, with a consistent premium, for as long as the premium is paid when due.
- Universal life insurance: Allows you to customize a premium and coverage as your needs change.
- Deferred annuities*: Has an accumulation phase (the owner puts money in the account) followed by an income phase (the account pays the owner).
- Immediate annuities: Purchased with a single payment, and the income can start right away.
Buyer’s typical age for life insurance and annuities**
- Term life insurance: 25 to 50 years old
- Universal or whole life insurance: 30 to 60
- Deferred annuities: 40 to 65
- Immediate annuities: 55 to 80
How life insurance and annuities pay out
- Term life insurance: Benefits are paid in a single sum when the insured passes away.
- Universal or whole life insurance: Benefits are paid when the insured passes away, borrows the cash value, takes a cash withdrawal or surrenders the policy.
- Deferred annuities: Benefits are paid either in a single lump sum or as income that can be customized by the owner.
- Immediate annuities: Benefits are paid in income that can be customized by the owner.
Now that you know the difference between life insurance and annuities, here’s what to keep in mind to further help you in establishing and maintaining your long-term financial goals:
- Most consumers overestimate the cost of a $250,000 term life policy for a healthy 30-year-old by more than three times its actual cost.***
- Someone who waits to get life insurance could develop conditions that make it harder—or impossible—to get coverage.
- Some annuities allow you to withdraw as much as 15 percent annually without paying fees or penalties.
- A guaranteed income annuity (a type of immediate annuity) can provide income throughout your life, or throughout both your and your spouse’s lives.