Life Insurance vs Annuity: What's the Difference?
Both annuities and life insurance can help you plan for financial security, but they work in different ways. Choosing between an annuity and life insurance often comes down to what risk you’re trying to manage: income while you’re alive, or protection for loved ones after you’re gone. Understanding how each works can help you decide which fits your long-term goals.
Key Takeaways
Life insurance is designed to provide a death benefit to your beneficiaries, helping protect them financially if you pass away.
An annuity is designed to provide income to you while you’re living, often used to create predictable retirement income.
The right choice depends on your goals. Think about if you’re most concerned with protecting loved ones or helping create a steady retirement income for yourself.
You can also combine life insurance and annuities to create a balanced financial plan for different life stages.
Understanding Life Insurance vs Annuities
Life insurance and annuities are both financial tools, but they serve opposite purposes at different stages of life. Both are sold by insurance companies because they are designed to provide financial protection against uncertainty in the form of defined benefits rather than market-based returns.
Life insurance offers financial protection to your family if you die, while annuities are designed to provide income to you while you’re alive, often during retirement. Used together, they can support both financial protection and long-term income planning.
How Life Insurance Works
Life insurance is designed to pay a death benefit to your beneficiaries when you pass away. Its primary purpose is income replacement and financial protection. The payout can help cover everyday living expenses, pay off debts, or support long-term needs for the people who rely on you.
There are two main types of life insurance:
- Term life insurance, which provides coverage for a set period of time, commonly 10 to 30 years.
- Permanent life insurance, such as universal or whole life insurance. Permanent policies can provide lifelong coverage and may include a cash value component.
How Annuities Work
Life insurance annuities are designed to offer a steady stream of income, most often during retirement. When you buy an annuity, you make either a lump-sum payment or a series of payments to an insurance company. In return, the annuity pays income back to you according to the contract terms.
Some annuity payments immediately, while deferred annuities grow over time and start paying later. The main goal is to help create predictable income so you’re less likely to outlive your savings, often supplementing sources like Social Security or retirement accounts.
Terms and payout amounts vary widely, so it’s important to compare contract details before buying.
Life Insurance vs Annuity: Side-by-Side Comparison
Although both products are issued by life insurance companies, they’re designed for opposite goals. One helps you build income, while the other helps your family replace it. Here are the key differences between annuities and life insurance:
| Feature | Life Insurance | Annuity |
|---|---|---|
Purpose | Provides a death benefit to beneficiaries to help replace income and cover financial needs after your death | Provides payments to you while you’re alive, helping supplement retirement income |
Who It Protects | Your family or other beneficiaries. | You (the contract holder) |
Timing of Payments | Death benefit payout. | Paid during your lifetime, often starting at retirement. |
Primary Goal | Income replacement and financial protection for loved ones. | Guaranteed income and longevity protection. |
Premiums or Contributions | You pay premiums for coverage. | You contribute money that is later returned as income payments. |
Tax Treatment | Death benefit is generally income tax–free for beneficiaries. | Growth is tax-deferred until withdrawals begin. |
Duration | Term or lifetime coverage. | Payments for a fixed period or for life. |
Depending on your goals and stage of life, one or both products may play a role in your overall plan.
Read: Reasons Life Insurance Won't Pay Out
Choosing Between Life Insurance and an Annuity
Choosing between life insurance and an annuity comes down to what financial risk you’re trying to manage. Life insurance is designed to protect others if you die, while annuities are designed to provide income to you while you’re alive. Understanding that distinction helps clarify which option fits your current priorities.
When to Choose Life Insurance
Life insurance can be a good option if your main goal is protecting loved ones from financial loss after you pass away. It can replace your income, cover debts, or help fund long-term goals such as college or a mortgage payoff.
You may lean toward life insurance if:
- You have dependents or a spouse who relies on your income.
- You want to ensure your family can maintain their lifestyle after your death.
- Your priority is financial protection rather than personal income.
When to Choose an Annuity
An annuity may make sense when your focus shifts to creating reliable income for yourself, especially in or near retirement. Annuities are often used to supplement Social Security or retirement savings and reduce the risk of outliving your assets.
You may want to choose an annuity if:
- You’ve already accumulated savings and want predictable income.
- You value stability and guaranteed payments over growth potential.
- You’re retired or approaching retirement and focused on income planning.
In simple terms, life insurance protects income that would be lost if you die, while an annuity helps turn existing savings into income you can rely on during your lifetime.
Expert Tip
Should You Buy Life Insurance or an Annuity First?
In most cases, life insurance comes first. If someone depends on your income or would be left with financial obligations if you died, protecting against that risk usually takes priority. Annuities are typically more relevant later, once income replacement is no longer the main concern and the focus shifts to creating reliable retirement income. The right order depends on your stage of life and whether your biggest risk today is leaving others financially exposed or outliving your savings.
Senior Director Life Underwriting
Using Life Insurance and Annuities Together
You don’t have to choose between life insurance and annuities. Many people use both to address different financial risks within a single long-term plan. One provides protection for your family if you die, and the other ensures income you can rely on later in life.
Benefits of Using Life Insurance and Annuities Together
Using both products can help balance short-term protection with long-term income planning:
- Life insurance can help protect loved ones from financial strain, cover final expenses, or support legacy goals.
- Annuities can help provide predictable income in retirement, reducing the risk of outliving your savings.
Together, they allow you to plan for uncertainty now while also building confidence around future income. For example, someone may rely on an annuity for retirement income while keeping life insurance in place to support a spouse, cover final expenses, or leave money behind for family members.
Read: Do You Need Life Insurance?
If I’m Retiring at 60, Should I Buy an Annuity or Life Insurance?
It depends on what financial risk matters most. If your family still relies on your income or you want to protect a spouse from financial disruption early in retirement, life insurance can help cover that gap. If your protection needs are largely met and your focus is creating dependable income, an annuity may be the better fit.
At 60, many people are balancing both priorities. You may still want protection in place while also planning for income that lasts throughout retirement. The right choice often comes down to how much risk you’re comfortable carrying and whether your bigger concern is protecting others or securing income for yourself.
A financial professional can help you compare both options and determine how they fit into your retirement strategy and long-term security.
Final Thoughts: Life Insurance vs Annuities in a Financial Plan
Life insurance and annuities protect against different financial risks and can both play a role in long-term planning.
- Life insurance provides peace of mind that your family will have financial support after you’re gone. It can replace income, cover debts, or help maintain your family’s standard of living.
- Annuities protect against the risk of outliving your savings. They create predictable income that continues even if the markets fluctuate or your other investments run out.
When used together, these products can help you manage both sides of financial planning, protecting what you’ve built and creating income you can’t outlive.
FAQs on Life Insurance and Annuity
Life insurance and annuities are designed to solve different financial problems. Life insurance provides financial protection for others if you die, typically through a death benefit paid to beneficiaries.
An annuity, on the other hand, is designed to provide income to you while you’re alive, often during retirement. In simple terms, life insurance replaces income that would be lost after death, while an annuity helps generate income later in life.
Yes. Many people use life insurance and annuities together because they address different needs. Life insurance can help protect a spouse or family members financially, while an annuity can provide dependable income during retirement. Used together, they can support both protection and income planning without overlapping roles.
What happens to an annuity at death depends on the contract. Some annuities pay any remaining value to beneficiaries, while others may stop payments when the annuitant dies. Life insurance is more straightforward: as long as the policy is in force, your beneficiaries receive the death benefit regardless of when it occurs.
It depends on the type of annuity. Fixed annuities typically offer predictable returns and are not directly exposed to market losses. Variable annuities and some indexed annuities may be tied to market performance and can fluctuate in value. Fees, surrender charges, and contract terms also affect outcomes, so it’s important to understand how a specific annuity works before purchasing
No. Life insurance is primarily a financial protection tool, not an investment. While some permanent life insurance policies build cash value over time, their main purpose is providing a death benefit to beneficiaries. Annuities, by contrast, are designed to generate income, often during retirement.
Life insurance death benefits are generally paid income tax-free to beneficiaries, which is one reason they’re often used for financial protection or legacy planning. Annuities work differently. Their growth is tax-deferred, meaning you don’t pay taxes until you withdraw funds or begin receiving income.
In some cases, yes. The cash value from a permanent life insurance policy can be used to purchase an annuity, though doing so may trigger taxes depending on how the transaction is handled. This is a more advanced planning strategy, so it’s important to review the details with a financial or tax professional before making a decision.
Both life insurance and annuities are issued by insurance companies and regulated for consumer protection. The level of safety depends on the financial strength of the insurer and the guarantees built into the specific product. Rather than comparing them directly, it’s more useful to evaluate the carrier’s ratings and understand what guarantees the policy or annuity actually provides.
Yes. Many people own both. Life insurance coverage can help protect loved ones or cover final expenses, while an annuity can provide income during retirement. Together, they address different financial goals and risks, which is why they’re often used as complementary tools rather than alternatives.
Yes. Some insurers offer hybrid or linked-benefit products that blend features of life insurance and annuities. These products may offer income flexibility, death benefits, or long-term care features depending on how they’re designed. Because they can be complex, it’s important to consult with a professional to understand how benefits are triggered and what trade-offs are involved.
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Chief Underwriter
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Feb 14, 2026
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