Annuities and life insurance: How are they different? 

Annuity vs. life insurance: a quick overview

While annuities and life insurance policies are both offered by life insurance companies, they work in opposite ways. With an annuity, you (the owner) are the beneficiary and will receive income payments in retirement. With a life insurance policy, your loved ones—or whoever you designate—are the beneficiaries and they will receive a lump-sum payout when you pass away.

Is an annuity life insurance?

No, annuities and life insurance are vastly different products. Annuities are financial products that can help you accumulate funds for retirement or generate a reliable stream of income in retirement. Life insurance, by contrast, is designed to protect your family’s financial future in case you pass away.

What is a life insurance annuity?

While most life insurance policies pay a lump-sum benefit, a life insurance annuity allows the policy to pay the benefit over a set period of time.

Life insurance and annuities basics

Since life insurance and annuities address unique needs, it makes sense that they operate differently. Let’s look at some of the ways that these products differ:

Benefits—The primary benefit of a life insurance policy is the death benefit that is paid to your loved ones when you pass away. The primary benefits of an annuity are tax-deferred growth potential and the ability to generate a steady stream of income in retirement.

Payouts—For the most part, life insurance pays the death benefit in one lump sum, while annuities typically pay benefits monthly over time when annuitized.

Beneficiaries—With an annuity, you (and in some cases your spouse) are the primary beneficiary, so you receive all income payments. With life insurance, your spouse, your children, or your other designated heirs are the primary beneficiaries, so they will receive the death benefit after you pass away.

Underwriting—With life insurance, you usually have to apply for coverage,¹ and your acceptance is often based on factors such as your age and health. No underwriting is required for an annuity; however, there may be some age restrictions on the benefits you select and the amount of income paid is dependent on your age and gender, among other things.

Time frame—Annuities are typically purchased later in life as a way to provide additional income in retirement. Life insurance is often purchased earlier, when the death benefit protection may be more important to your loved ones.

Funding—Life insurance policies are usually funded by monthly or annual premiums (payments) that you make over time, while annuities are usually funded in one or more lump-sum payments.

Related: How much does life insurance cost?

Should I choose life insurance or an annuity?

While it’s always advisable to consult a New York Life agent, here are a few basic guidelines to consider as you weigh your options:

Choose life insurance if…

• You want to make sure your loved ones are financially secure if you pass away.
• You have one or more dependents who rely upon your income.
• You have a mortgage, business loans, or other significant financial obligations.
• You are looking for a tax-free way to leave money to your loved ones.
• You could use a tax-efficient way to accumulate wealth in a form of cash value in the policy (whole life).
• You need a source of protection that fits your budget while you build other assets (term life).

Choose an annuity if…

• You are worried about outliving your retirement savings.
• You need an additional source of income in retirement.
• You would like to accumulate tax-deferred savings for retirement.
• You want to “off-load” some financial risk to your insurance company.
• You are looking for an easy way to satisfy your required minimum distributions (RMDs).
• Your Social Security benefits fall short of covering your basic expenses.

Let’s explore your options, together

If you’re still not sure if an annuity or life insurance policy is best for you, please feel free to contact a New York Life agent. As a financial professional, your agent will listen to your needs, review your options, and answer any questions you may have. That way, you can be sure that you have everything you need to make a sound, educated decision.

Life insurance and annuity FAQs

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¹Guaranteed acceptance life insurance products are an exception.