Both annuities and life insurance should be considered in your long-term financial plan. While both include death benefits, you buy life insurance in the event you die too soon and an annuity in case you live too long. In other words, life insurance provides economic protection to your loved ones if you die before your financial obligations to them are met, while annuities guard against outliving your assets.
Comparing deferred and immediate annuities
There are two main types of annuities-deferred and immediate-and two main types of life insurance-term and whole life.
Life Insurance | Annuities |
| ||
Term life | Whole life | Deferred annuities | Immediate annuities | |
Main reason for buying it | Provide income for dependents | Provide income for dependents or meet estate planning needs | To accumulate money in a tax-deferred product | To assure you don’t “outlive your income” |
Pays out when | You die | You die, borrow the cash value or surrender the policy | You make withdrawals | One period after you buy the annuity, stops paying when you die* |
Typical form of payment | Single sum | Single sum | Single sum or income | Lifetime income |
Buyer’s age when it is typically bought | 25-50 | 30-60 | 40-65 | 55-80 |
Accumulates money tax-deferred? | No | Yes | Yes | Yes, but only in the early payout years |
Pays a death benefit? | Yes | Yes | Yes | *payments continue if the annuity has a guaranteed-period option that hasn’t expired at the annuitant’s death |
Are benefits taxable income when received? | No | No, unless a cash value withdrawal exceeds the sum of premiums | Yes, but only the part derived from investment income | Yes, but only the part derived from investment income |
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