Annuities vs. Life Insurance: What's the Difference?

In this article...
  • Compare and contrast annuities vs. life insurance. Learn how each product benefits you and your family, and find out how to decide which one is best for you.

As you're planning for your financial future, one big question arises: annuities vs. life insurance? Both can have a place in your retirement and estate planning processes — but the type and amount of coverage you need depend on your financial goals.

What Are Annuities?

An annuity is an insurance product that gives you a predictable income, making it easier to plan for retirement. You pay into the annuity with a lump sum or a series of premiums; it pays out regularly for a fixed period or the rest of your life.

Annuities can either be deferred or immediate. With a deferred annuity, you pay premiums for a set amount of time and allow your investment to grow. After retirement, or at the age you choose, the annuity starts to payout. With an immediate annuity, you make a lump-sum payment and start getting payouts right away or within a year.

Annuities are extremely flexible; you can customize them to suit your unique situation. Some options include:

  • Fixed, indexed, and variable accounts
  • Fixed or lifetime payouts
  • Payout age
  • Death benefit or refund of the remaining principal to heirs

Typically, annuities are used to guarantee a steady income in retirement — depending on how they're structured, they can eliminate the risk of outliving your savings and other investments. In some cases, annuities are a way to protect large sums of money, such as inheritances or lottery winnings. By putting the funds in an annuity, you can guarantee an income and prevent mismanagement.

Benefits of Annuities


  • Guaranteed retirement income
  • Growth is tax-deferred
  • Protects your principal
  • No limits on contribution

Drawbacks of Annuities


  • High upfront fees and commissions
  • Surrender fees for withdrawing early
  • Ties up your cash
  • Complicated tax implications
  • Relatively low return on investment
  • Withdrawals before age 59.5 are subject to capital gains taxes

What Is Life Insurance?

Life insurance is a type of insurance that pays a lump sum of money — called a death benefit — to a specific person or institution after your death. It's typically used to provide financial security for dependents or inheritance for heirs.

Life insurance can also have benefits during your lifetime. Some contracts pay dividends. Others accumulate a cash value that you can borrow against to meet your cash-flow needs.

Types of Life Insurance

Life insurance providers offer a wide variety of products; each has different terms and benefits.

Term Life Insurance

This type of life insurance is good for a specific term (or number of years) — usually, 10, 20 or 30. You pay monthly premiums for the duration of the term; if you happen to pass away during that time, your beneficiaries receive a death benefit. Term life insurance policies offer affordable premiums and flexible coverage limits.

When you're raising a family, there can be periods of time when your expenses are high. A term life policy ensures that your dependents can pay the bills if you pass away. 

Permanent Life Insurance

Permanent life insurance offers lifelong coverage as long as you keep paying the premiums. Within this category, there are several main options:

  • Whole life insurance: Straightforward and predictable, this type of insurance offers fixed premiums and a death benefit. Some policies build a cash value; others pay dividends.
  • Universal life insurance: These policies accumulate cash value slower, but the premiums are typically affordable and flexible. The death benefit may also be adjustable.
  • Indexed universal life insurance: This type of insurance is tied to a stock market index. The cash value grows based on the performance of the index, giving you a higher potential rate of return than whole or universal policies. However, premiums may also be more expensive.
  • Variable universal life insurance: Variable universal policies have the most growth potential and the highest risk. You can invest part of your premium into a variety of investment accounts; the policy's cash value depends on how those funds perform.

Benefits of Life Insurance


  • Provides a tax-free death benefit
  • May offer access to cash during your lifetime
  • Available riders can customize coverage

Drawbacks of Life Insurance


  • May require a medical exam
  • Premiums may increase due to age or health conditions
  • Inflation can offset increases in cash value

Annuities vs. Life Insurance: Which Should You Choose?

For many people, the decision between annuities and life insurance comes down to your situation and financial priorities. Life insurance provides for your dependents after your death. Annuities provide an income during your lifetime; they can help ensure that you don't outlive your savings and Social Security benefits.


Life Insurance

Payout Type

Guaranteed income during your lifetime 

Lump sum to your beneficiary after you die


Immediate or deferred payout

Temporary or permanent coverage

Control over investment

Variable annuities only

Variable universal policies only

Access to cash

Possibly, with high taxes and fees or a free withdrawal provision

Can borrow against cash value

Tax-deferred growth



Payouts taxed

Partially; the interest is taxed but the premium is not

No, unless paid to an estate

Death benefit



Available Riders

Death benefit, lifetime income, return of premium, long-term care, cost of living adjustment, guaranteed withdrawal

Long-term care, chronic or terminal illness, accidental death, waiver of premium, return of premium, family income, charitable giving, guaranteed insurability

Flexible investment options



Surrender fees

Yes, if canceled in the first 10 years

Yes, if canceled within the first 10-15 years

Do You Need Life Insurance if You Have an Annuity?

You may need life insurance if your annuity doesn't benefit your dependents after your death. This can happen if the annuity doesn't have a return of premium or death benefit rider or if the potential payout is too small to meet your family's needs. Life insurance allows you to customize coverage limits and provide a guaranteed death benefit.

Why Would You Purchase Life Insurance Rather Than Annuities?

You might purchase life insurance instead of an annuity if you're young and you have dependents. It provides peace of mind and guarantees your family's financial stability. Plus, the cash value makes it easy to get low-cost loans down the line, while an annuity ties up funds for a long period of time. 

The choice between annuities and life insurance is highly subjective  — it depends on your age, financial situation and family situation. Not sure which to choose? Contact a financial advisor to help assess your finances and make a recommendation that suits your goals.

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