Annuity vs. Life Insurance

(Simply put, the difference between annuities and life insurance is a matter of life and death)

Reviewer: Jeffrey Green Written by Jeffrey Green
Reviewer: Jeffrey Green
Written by Jeffrey Green

Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career.  He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.

Annuity vs Life insurance

Running out of money continues to be a top concern in retirement planning. Annuities are retirement products designed to build wealth and create lifetime income. They provide insurance against living too long and unfavorable market conditions.

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Retirement Saving Using an Annuity

Annuities used for retirement savings are called deferred annuities. They provide an income after a certain number of years. During the deferral period, one or more premiums are paid to the insurance company. The premiums are held in an account and grow tax deferred.  

There are two types of deferred annuities:

  • Variable annuities: These have a selection of investments that are similar to mutual funds. The principal and growth are not guaranteed.
  • Fixed annuities: These have a guaranteed interest rate. The insurance company guarantees principal and growth.

Retirement Income Using Annuities

In exchange for a sum of money, the insurance company will provide a guaranteed income. This is called an immediate annuity. The money may come from an accumulated deferred annuity or other sources. You can select from a number of different options.

  • Life only: The insurance company guarantees an income no matter how long you live. When you die, your beneficiaries do not receive anything.
  • Life and 10 years certain: The insurance company guarantees an income no matter how long you live. The insurance company guarantees that at least 10 years of payments will be made if you live less than 10 years. Your beneficiaries receive the difference between 10 years of payments and the number of payments made. 20-year certain options are also available.
  • Joint and survivor: The insurance company guarantees an income for your life and your spouse's or partner's life.
  • Income riders: The insurance company guarantees a lifetime income based on the greater of market performance or a predetermined schedule. These riders are often a feature of variable annuities. 

Annuity Death Benefits

The death benefit of an annuity is usually the accumulated value. It is paid to a beneficiary and is taxable. Some annuities offer a variety of enhanced death benefits for a fee.


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Annuity Advantages

  • Protects retirement income against living too long and unfavorable markets.
  • Annuities offer tax-deferred accumulation.
  • In some states, annuities are protected from creditors.

Annuity Disadvantages

  • Penalties for withdrawals prior to age 59-1/2
  • Fees 

What Is Life Insurance?

Life insurance protects beneficiaries against the premature death of the insured. Life insurance is used to:

  • Protect families from loss of income 
  • Provide funds for specific purposes, such as education
  • Provide funds for final expenses
  • Provide funds for child care

Life insurance is also often used to insure key employees, or as an employee benefit. Life insurance can also provide living benefits such as disability or long-term care. In some instances, life insurance can provide retirement income.

Life Insurance Protection

In exchange for a premium, the insurance company agrees to pay a benefit if the insured dies.

  • Proceeds are usually paid to a named beneficiary. 
  • Proceeds are income tax free to the beneficiary.

Life insurance that is strictly for protection is called term life insurance. Term insurance provides a benefit for a specific number of years and then expires. Term insurance is relatively inexpensive, especially for young, healthy people. 

As you age or if your health deteriorates, term insurance can be inordinately expensive or unavailable. Approximately 2% of term insurance purchased actually pays a death benefit.

Life Insurance Living Benefits

Life insurance that is designed to provide a benefit for life is called permanent life insurance. Over time, permanent life insurance builds account values that can be used for emergencies, income, or anything else. The account values build tax deferred.

Life insurance companies also offer a disability waiver of premium for an additional fee. If the insured is disabled, the insurance company will pay the premium, and the policy will continue to build value. 

Some life insurance companies offer a benefit to paying for long-term care. There may be an additional fee for this benefit, or it may be included in the premium.


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Life Insurance Advantages

  • Creates an “instant estate,” providing beneficiaries with a predetermined amount of money.
  • Can be used for multiple purposes, including supplemental retirement income and long-term care.
  • In some states, life insurance is protected from creditors.

Life Insurance Disadvantages

  • Time is required to build value of permanent insurance.
  • Term insurance expires at the end of the period with no value.

Life Insurance vs. Annuities: What Is the Difference?

The long and short of it is that annuities protect your retirement income. Life insurance protects your beneficiaries from economic loss.

Life Annuity
Guaranteed retirement income      No Yes
Death benefit Specified Account value
Tax-deferred accumulation     Yes Yes
Income tax-free death benefit Yes No
Tax treatment of income                                            Ordinary Ordinary
Penalty for early withdrawal Only If MEC Yes
Surrender charges Yes Yes
Disability waiver Yes No
Long-term care benefit Yes Limited
Creditor protection Yes by state Yes by state

What You Should Do Next...

  • Review your life insurance
    • How much do you have?
    • What type?
  • Review your retirement plan
    • What are your goals?
    • Are you on track?

Your Local Independent Insurance Agent Can Help You

How much life insurance do you need? Is an annuity right for you? Your local independent agent has the expertise and experience to help you answer those questions and more. They can help you plan for retirement. Plus, independent insurance agents work for YOU and not one insurance provider. 

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