Difference between Annuity and Life Insurance

Both annuity and life insurance should be considered when making your financial plans. Though the both terms regard in one way or another to death benefits, annuity is bought in case you are living long enough, while life insurance is bought when you consider the possibility of dying too soon. In a more descriptive language, annuity is meant to back you up in case your life outdoes your assets. Life insurance means to provide an economic hedge for the people who depend on you, in case you die.

Definition of Terms

Annuity

In layman’s language, annuity can be defined as a large amount of money that you invest, to provide you with a monthly stream of benefits in a period that is fixed, or for life.

Immediate Annuity

Immediate annuity is where, when you pay a given amount of money to your insurance company, the company will supply you with a regular payment, for a given length of time, which is in most cases, as long as you live.

Deferred Annuity

When you annuity is referred to as deferred, you are required to invest in an insurance company. The tax that would have been charged on any investment remains deferred, in this case, up to the time that you will make a withdrawal (1). For any withdrawal that is made before the time set reaches, a penalty tax is imposed together with other ordinary taxes.

For people with a lot of money, having a deferred annuity is a way of legally avoiding tax on their investments, for as long as it will take them.

Life Insurance

Life insurance is a safety net that is put against any financial loss that would emanate from the death of the person insured. When the insured person becomes deceased, the benefits of the life insurance are transferred to a “beneficiary,” to act as a cushion against the financial loss.

The purpose of a life insurance is to offer enough financial security to dependants, in case the breadwinner desires that the dependants continue to gain a constant supply of finance benefits even after death.

Term Life Insurance

This arrangement of insurance is meant to provide some benefits after death, for a given period of years, but not a life time. The term in which the benefits are provided is determined by the type of term insurance that you will buy. If you die before the agreed term ends, the beneficiaries you designated will receive benefits. If you will die after the agreed term is over, there will not be any benefits transferred to your beneficiaries.

Whole Life Insurance

This type of life insurance gives a death benefit to your dependants, whether you are old enough or not. This option provides the benefit at any point of your death, provided you are in good terms with the payment policy of your premium.

A Comparative Analysis between Annuity and Life Insurance

Key Similarities

There are key similarities between the two subjects. The two products are an installation that is meant to protect the future interests of the individual. None of the two insurance products have an immediate benefit.

The two insurance products are similar in that, they are meant to come in handy, for situations that may be beyond the capacity of the individual in averting. While one can defer retirement, it is hard to determine whether you will be financially stable after you have retired or not.

Key Differences

Reasons for Buying

There are very different reasons that one considers when buying an annuity or a life insurance. For an annuity, you buy it for the purpose of securing your future with income, in case you retire, or lose your job. On the other hand, buying a life insurance is motivated by the very fact that death is real, and you would want to live financial provisions to your dependants after you are dead.

How the Insurance Company Makes the Payments

For an annuity, there are different ways in which the insurance company pays it out, based on whether the annuity is deferred or immediate. When the annuity is immediate, the payment made is an income of a lifetime. The deferred annuity option pays out a lumps sum, and the income that should be paid out.

On the other hand, for lifetime insurance – whether a term or whole life insurance – the benefits paid after the death of the insurer are paid in whole to the beneficiary. The lump sum is determined at the time of buying the insurance by the policy holder.

Benefits In the Case of Death

This is one of the major confusion areas that people find it hard to distinguish between the two subjects.

In annuity, the payments of benefits in the case of death require some more understanding. When death occurs during the period of paying the annuity, the situation is treated differently than when there is the occurrence of death after the annuity benefits have started to be paid to the beneficiary.

For immediate annuity, payments of benefits stop when the individual dies, since the benefits are supposed to benefit when alive. However, there are some guarantees put in place.

In the case of deferred annuity, if an individual dies before completing the payment of his annuity fee, then the insurance company refunds all the premiums that the person had paid, to the point of death.

For the life insurance, whether term or whole, it is easily understood that benefits are only paid outdo the dependants or beneficiaries when the policy holder dies.

Summary

Although the two subjects of discussion show a similarity to some extent, the differences are mainly as a result of the objectives that the client – who is the policy holder – wishes to meet. Annuity is considered more by people who are concerned about their retirement days, while life insurance is mostly associated with being prepared for what is not known.

For the two entities, it is correct to consider them both as very different entities, whose differences clearly distinguish their functions and characteristics. It is important to note that when life insurance is a product to help your dependants upon your death, annuity is set to provide a catch net to sustain you with an income for as long as you live. It is therefore possible to have the two insurance products for yourself. Annuity will benefit you as an individual while you live, and a life insurance will benefit your dependants and beneficiaries after you pass on.

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