Annuities and life insurance: How are they different?

Since annuities are financial products offered by life insurance companies, it’s easy to see why people often get annuities and life insurance confused. As this article will show, annuities operate very differently from life insurance policies and are created to help you meet a unique set of goals and objectives.

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A quick overview of the differences between life insurance and an annuity

While annuities and life insurance policies may come from the same place, they are almost mirror images of each other. That’s because life insurance policies protect your family’s financial well-being in case you pass away, while annuities help protect your financial well-being by providing a pension-like stream of income that you can use to help fund your retirement.


Life insurance and annuities basics

Since life insurance and annuities address unique needs, it makes sense that they operate differently. Let’s take a 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 benefit of an annuity is the pension-like stream of income you will receive in retirement.

Payouts—While life insurance pays the death benefit in one lump sum, 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.


How do I know which product to choose?    

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 running out of income in retirement.
  • You would like to create an additional source of income in retirement.
  • You expect to live a long time and would like some “longevity insurance.”
  • You would like 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.


We’re here to help

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.


Frequently asked questions

In many cases, yes. Since one product helps safeguard your family’s lifestyle and the other helps safeguard your retirement, people often use both to build what is essentially a “portfolio of protection.”

There are distinct advantages to both products, so it really comes down to which one meets your needs. If you need an additional source of income in retirement, an annuity has a lot to offer. If you want to make sure your loved ones are financially protected in case you pass away, a life insurance policy is most likely the way to go.

Using what is called a 1035 exchange, it is possible to convert the cash value of a life insurance policy to an annuity, without having to pay taxes. However, there are a lot of factors and potential expenses to consider, so it’s best to speak with an agent or other financial professional before taking any action.

While annuity and life insurance products are generally considered safe, both are backed by the claims-paying ability of the insurance company, so it’s important to consider the financial strength of the company before making a decision. If safety is a significant concern, be sure to look for products such as whole life insurance or lifetime income annuities that offer the most guaranteed benefits and features.

Yes. Most annuities offer some death benefit protection if the owner passes away. The amount and method of payment your beneficiaries receive will vary based on the remaining value of the annuity at the time of your death and the terms of the annuity contract.

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1Guaranteed acceptance life insurance products are an exception.