Annuity vs Life Insurance: How They Differ and How to Choose

• Life insurance provides a death benefit to your beneficiaries; an annuity provides income to you while you’re living.
• Annuities can help supplement retirement income; life insurance replaces your income after your death to help support your family.
• 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.

Both are financial tools designed to protect income, but they work in opposite ways. Life insurance replaces income after death, while an Life insurance annuity helps create steady income during retirement. Together, they can form the foundation of a balanced long-term plan.

How Life Insurance Policies Work

Life insurance pays a death benefit to your beneficiaries when you pass away. It’s designed to replace lost income, cover debts, or help your family maintain financial stability. There are basically two types of life insurance:

• Term life insurance, which covers you for a specific number of years (usually 10-30).
• Permanent Life insurance products, such as whole life insurance or universal life, which lasts a lifetime and can build cash value over time.

How Annuities Work

Annuities offer a steady stream of income, usually during retirement. When you purchase an annuity you either make a lump-sum payment or a series of annuity payments to a life insurance company. In return, you receive regular payouts later. The goal is to supplement traditional retirement savings (like an IRA or social security payouts) so you don’t outlive your retirement income. 

Some annuities begin paying right away, while others grow until you choose to start withdrawing. Terms and payout amounts vary widely, so it’s important to compare contract details before buying.

Read: What is a Life Insurance Beneficiary?

Although both products are issued by insurance companies, they’re designed for opposite goals. One helps you build income, while the other helps your family replace it. 

Here’s how they compare at a glance:

Both can play valuable roles depending on your financial goals and stage of life, and some people may use both products together to balance protection and income needs.

Read: How does Whole Life Insurance Work

Deciding between life insurance and annuities depends on your priorities. Is it more important to protect your family’s future or secure your own income in retirement? Here’s how to know which might fit your needs best.

When Life Insurance Makes the Most Sense

Life insurance is ideal 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 its lifestyle after your death.
• You’re focused on building a financial safety net rather than generating income for yourself.

When an Annuity Is the Better Option

An annuity can make sense if you’re nearing retirement and want predictable, guaranteed income. It helps supplement Social Security, traditional retirement, or pension payments and reduces the risk of outliving your savings.

An annuity may be a better fit if:

• You’ve already built sufficient savings and want steady income for life.
• You prefer low-risk, predictable payments over market volatility.
• You’re retired, or close to it, and value stability more than growth.

Each product serves a different stage of financial life: life insurance protects income you haven’t earned yet, while an annuity turns existing savings into future income.

You don’t have to choose between life insurance and annuities. Many people use both to create a well-rounded financial plan. One provides protection for your family, and the other ensures income you can rely on later in life.

Read: Dividend Paying Whole Life Insurance

How People Benefit from Combining Both

Pairing life insurance and annuities can help balance financial priorities:

• Life insurance protects your family if something happens to you unexpectedly.
• Annuities provide steady, guaranteed income so you can enjoy retirement without worrying about market swings.
• Together, they help create a plan that can help cover life’s ‘what-ifs’ and retirement’s ‘what-nows.’

For example, a couple might use an annuity for retirement income while maintaining life insurance to leave a legacy or cover final expenses. The combination can help build financial confidence at every life stage.

Both life insurance and annuities play important roles in long-term financial security, but they protect you in opposite ways.

• 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.

Your ideal choice depends on where you are in life and what you want your money to accomplish. Life insurance and annuities both help protect your financial future, but they serve different needs.

If you’re still building wealth and have people who depend on your income, life insurance should probably come first. It helps your family maintain financial stability if you pass away unexpectedly.

If you’re approaching or already in retirement, an annuity may offer more value. It provides predictable income that can supplement Social Security and cover day-to-day expenses without worrying about market performance.

If I’m Retiring at 60, Should I Buy an Annuity or Life Insurance?

It depends on your goals. If your family relies on your income, life insurance can protect them if something happens to you early in retirement. But if you’ve already met your protection goals and want reliable income for life, an annuity may be the better fit.

A financial professional can help you compare both options and determine which aligns with your retirement strategy and long-term security.

Read: Life Insurance vs AD&D Insurance

Both life insurance and annuities can play an important role in a sound financial plan. Life insurance protects your family’s financial future, while annuities protect your retirement income. When combined thoughtfully, they can work together to support both short-term needs and long-term goals.

At Ethos, we focus on helping you find the right life insurance coverage for your needs. While we don’t offer annuities at this time, understanding how they work alongside life insurance can help you build a stronger, more confident financial plan for your future. Our online process makes it simple to explore your options and find the protection that fits your goals.