Life Insurance vs. an Annuity: What’s the Difference?

man and woman with their dog just purchased life insurance

In this Article

While annuities and life insurance policies have similar structures, they’re fairly different in how they work.

Before you decide which option is best for your needs, it’s important to have your financial goals in mind – do you want to ensure your children are financially protected if something were to happen to you? Are you interested in building a retirement savings plan with security and guarantees? Read on to learn about some key differences between life insurance and annuities to determine which option might be a good fit for you.  

Life insurance protects your loved ones  

Life insurance plans, such as term life or permanent life insurance, provide income to your chosen beneficiary if you pass away while the policy is in force. The primary benefit of life insurance is that your loved ones will have funds to cover costs related to your passing as well as money to continue paying the mortgage, monthly bills, and possibly cover expenses such as a college education.  

The death benefit your loved ones receive is tax-free, which is a great advantage to life insurance. Some life insurance plans offer additional benefits such as a cash value component that acts as a savings plan within the policy. These aren’t as technical as an annuity but can help you build up some savings to use to pay off debt, cover expenses, or use as income during retirement.  

 An annuity provides a guaranteed retirement income stream 

An annuity is a contract between a company and an individual in which the company agrees to provide the individual with regular payments when the contract is “annuitized.” Most people purchase an annuity to safeguard their financial future during retirement.

Annuities provide tax-deferred savings as guaranteed income in retirement. Similar to life insurance, an annuity provides a death benefit to a beneficiary, but the death benefit is not tax-free. Annuities are generally classified as deferred or immediate, depending on when you choose to start receiving income.  

A deferred annuity provides income later in life; income is deferred until premiums are paid several years later. When you choose a deferred annuity, you’ll also choose whether you want a fixed or variable annuity. Your choice between the two depends on if you want to make a safe investment or jump into the market with the opportunity for growth potential. 

An immediate annuity begins paying income immediately – no later than one year after you start paying premiums. Most people purchase an immediate annuity with a lump sum and schedule out regular payments over several years. 

Key features and differences between life insurance and annuities

Differences between life insurance and an annuity

Life insurance provides a death benefit to your chosen beneficiaries in the event that you pass away or become critically ill or disabled. An annuity is a retirement savings solution that is primarily used to grow funds that can provide scheduled payouts during retirement.

While an annuity’s cash value accumulates tax-deferred, this is only true for specific life insurance policies (mostly whole life insurance plans). 

How to choose between life insurance and an annuity 

The key to choosing between life insurance or an annuity is to think about your goals. If you primarily want to have financial protection for your loved ones if something happened to you, then a product like term life insurance is a great choice. If your goal is to start saving for retirement, an annuity is a perfect fit.

If you want to learn more about your options, we’re always here to answer any questions or help you get a plan in place. Ready to get life insurance? Learn more about our ten-minute application for term life insurance or discover if a permanent life insurance policy is a better fit for your goals.

Connect with a Quility insurance advisor for a customized annuity plan

If you are interested in purchasing an annuity, our licensed agents are here to help you take the next steps – connect with a licensed agent today.

Let’s Get Started

Your Quility advisor can help you determine which annuity is best for your goals.

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Calie Brummer
Head of Digital Communications
Calie Brummer is a staff writer and Head of Digital Communications at Quility Insurance with a focus on financial well-being and life insurance solutions.