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Life insurance or an annuity – what’s right for me?

Life insurance protects your loved ones upon your death, while an annuity protects your income in your retirement years.

Saving money for just-in-case and when-your-time’s-up scenarios is smart. Life insurance and annuity products will help you and your loved ones with each. Here’s the lowdown on what you need to know about both insurance products — so you know what’s right for you.

How they pay policyholders

These insurance products pay differently. Here’s what you need to know:

Life insurance payouts

With life insurance, a beneficiary can opt for the payment of the death benefit in one lump sum (or one single payment) or in a specific income payout, in which an interest-bearing account is set up to deliver monthly or annual payments to the beneficiary.1

A lump sum payment isn’t taxable; however, the interest is taxable. Another option, a retained asset account, accrues interest over time and allows for the beneficiary to access the proceeds by writing a check against the account’s balance.2

Annuity payouts

With an annuity, payments can stream in over time, which can help supplement a person’s retirement income. It’s guaranteed income for a set period of time.

In order to not be charged a premature distribution tax penalty, you must be at least 59.5 when you take out your money from a deferred annuity. Different annuities have different payout schedules. Be sure to consider your financial goals and an annuity’s timeframe of payout and fee structure. Note: Some deferred annuities cannot be liquidated for eight years or more without incurring a surrender penalty.

With an immediate annuity, distribution payments start soon after a single premium payment is made. With a deferred annuity, distribution payments start on a set date in the future. Immediate annuities (and annuitized payouts from deferred contracts) may be offered as fixed or variable payouts. Fixed payouts are predictable and guaranteed; variable payout amounts will fluctuate based on the investment amount, rate of return and expenses.


For your life insurance policy, you’ll want to select a beneficiary, a person or an entity (i.e., your business), to receive the death benefit when you die. You can choose more than one beneficiary and divide the proceeds among them as you see fit. Also, have a contingent beneficiary as backup, in case your primary beneficiary dies before you.3

For a non-qualified annuity, you can choose multiple beneficiaries and you can designate different percentages of the annuity to each one. (If you don’t name a beneficiary, it’s likely the annuity will go through probate, which could result in attorney and court fees.) You can also change a beneficiary as long as you’re not required to name an irrevocable beneficiary. If the beneficiary is a spouse, they can defer the taxes until they take the distributions. A non-spouse who inherits an annuity can either 1) pay the income tax on the lump sum payment, 2) stretch out taxation of the gains by taking lifetime payouts, or 3) take advantage of the five-year rule in which the beneficiary withdraws smaller amounts from the annuity during this time to avoid taking one lump sum payment in the fifth year, which could put them in a higher tax bracket.4


An insurance underwriter screens applications and calculates the risk of each applicant, determining an appropriate premium for life insurance coverage.5

Annuities typically don’t require underwriting, making annuities with a death benefit rider a good option if an individual does not qualify for life insurance.

Time frame

Most states allow insurance companies up to 30 days to review a claim. However, the payout process could take longer if the policyholder died less than two years after purchasing the insurance policy and fraud or misstated health information on the application is suspected.6


Your life insurance policy can fund a trust. The grantor (you) sets it up, it’s managed by a trustee, and the beneficiary benefits. The great thing about a trust is that it can lead to faster estate settlements and reduced tax burdens.7

There are two common types of life insurance trusts to choose between: an irrevocable (ILIT) trust and a revocable (RLIT) trust. You cannot change or cancel an ILIT once it’s set up. However, because an ILIT is not subject to estate taxes and claims from creditors, the beneficiaries tend to take home a larger inheritance. (Estate taxes apply only to large estates). On the other hand, a RLIT, aka a living trust, can be changed or cancelled. It only becomes irrevocable after you die or become incapacitated. A RLIT might be a better choice for growing families that will experience some changes along the way.7

Advantages to both

If you’ve maxed out your tax-advantaged retirement plans, such as a 401(k) or IRA, a deferred annuity can be a good option to help finance your retirement years. Also, you might feel more secure knowing you can count on some guaranteed income from an annuity, during your golden years.

Special circumstances allow you to use your own life insurance policy to your advantage. Called living benefits, life insurance riders let you access your own death benefit during your lifetime if you need long-term care or help with expenses and care related to a terminal (or critical) illness.8

Learn more about annuities and life insurance here. And talk to a financial professional to see which one is right for your long-term financial plan, based on your goals.

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1. Van Keuren, Mary. “How Will Life Insurance Pay My Beneficiaries?” April 28, 2023,

2. Cruz, Gabriel Rodriguez; Rojas, Bianca Rodriguez. “What is Life Insurance and How Does it Work?” April 4, 2023,

3. Leefeldt, Ed. “What Is a Life Insurance Beneficiary?” July 6, 2022,

4. Tretina, Kat. “What Is an Annuity Beneficiary?” January 19, 2023,

5. Bourne, Mariah. Insurance Underwriter, July 12, 2023,

6. Huddleston, Cameron. “Guide to Life Insurance Payout Options,” June 29, 2022,

7. Horton, Cassidy. “Life Insurance Trust: Types and How to Fund,” May 22, 2023,

8. Fontinelle, Amy. “Top Benefits of Life Insurance,” October 8, 2022,

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to nonqualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals. Variable annuities have additional expenses such as mortality and expense risk, administrative charge, investment management fees and rider fees. Variable sub accounts of annuities are subject to market fluctuation, investment risk and loss of principal.

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Life insurance products contain charges, such as Cost of Insurance Charge, Cash Extra Charge, and Additional Agreements Charge (which we refer to as mortality charges), and Premium Charge, Monthly Policy Charge, Policy Issue Charge, Transaction Charge, Index Segment Charge, and Surrender Charge (which we refer to as expense charges). These charges may increase over time, and these policies may contain restrictions, such as surrender periods. Policyholders could lose money in these products.

This is a general communication for informational and educational purposes. The information is not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional.

Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.

DOFU 8-2023