While there are several types of life insurance and annuity products, both are financial contracts issued by insurance companies that can help provide greater financial security for you and your family.
In general, life insurance protects your loved ones financially after you pass away, while an annuity can provide a stream of income during your retirement years.
“Life insurance and annuities can play different but complementary roles in a financial plan. The key is understanding how each product aligns with your individual goals, time horizon and financial needs so you can make informed decisions with confidence,” said Ben Roth, second vice president, Life and Annuity Product Development.
Here is general information about how they differ to help you determine what may be right for you.
What each is designed to do
A simple way to think about it: life insurance is primarily designed to provide money to others after you die. An annuity is primarily designed to provide income or help grow money for your retirement.
Life insurance provides for those you leave behind
When you buy life insurance, you name one or more beneficiaries who receive a death benefit when you die. The benefit is often paid as a lump sum, although other payout options may be available depending on the policy.
Life insurance death benefits are generally not subject to federal income tax when paid to a beneficiary. However, interest earned on the proceeds may be taxable.1
Annuities provide income for retirement
An annuity is designed to help you save for retirement and/or turn savings into income. Depending on the type of annuity and the options you choose, payments may last for a set number of years or for the rest of your life.
Annuities are generally intended to be long-term products. Money grows tax deferred, which means you generally do not pay taxes on earnings until you take money out. Withdrawals before age 59½ may be subject to a 10% additional federal tax unless an exception applies.2 Annuities may also have surrender charges or other fees for early withdrawals.
An immediate annuity typically begins making income payments soon after you purchase it. A deferred annuity is designed for money to grow before payments begin later. Fixed annuities can offer predictable, guaranteed interest or income, while variable annuities can rise or fall based on the performance of underlying investment options and may lose value.
Who receives the money?
With life insurance, you choose a beneficiary — such as a spouse, child, other person, trust or organization — to receive the death benefit. You can usually name more than one beneficiary and a contingent beneficiary as a backup.
An annuity can also have beneficiaries who may receive the contract’s remaining value or a death benefit, depending on the contract. The tax rules for inherited annuities can be more complicated than for life insurance, so beneficiaries may want to consult a tax professional.
Do you need to answer health questions?
Life insurance often involves underwriting. The insurer may consider factors such as your age, health and other information to determine whether you qualify for coverage and how much you will pay.
Annuities generally do not require medical underwriting, which can make them accessible to people whose primary goal is retirement income rather than life insurance protection.
When can you access the money?
Life insurance is primarily purchased for the death benefit, so the main payout generally occurs after the insured person dies. Some permanent life insurance policies build cash value that can be accessed during life, and some policies offer optional riders that provide benefits in certain circumstances.
What about taxes and estate planning?
Life insurance can also play a role in estate planning. For example, a trust may own a life insurance policy or receive policy proceeds. Trust and estate strategies can be complex, so consider working with a financial, tax or legal professional.
Annuities are generally tax deferred. When you take distributions from a nonqualified annuity, the portion representing earnings is generally taxable as ordinary income. The tax treatment can differ for annuities held in qualified retirement accounts and for inherited annuities.3
Which fits your goal?
The choice becomes easier when you start with what you want the money to do. Life insurance may be worth considering if your priority is helping protect people who depend on you financially, paying final expenses or leaving a legacy. An annuity may be worth considering if your priority is building retirement assets or creating a dependable stream of retirement income.
“You may also need both,” noted Ben. “Life insurance and annuities solve different financial needs, so they often work together as part of a broader retirement and estate plan.”
Talk with a financial professional about your goals, time horizon, need for access to your money, risk tolerance and tax situation before deciding what role life insurance, an annuity or both may play in your long-term financial plan.
