Life insurance and annuity: What’s the difference?

When it comes to planning for your future and protecting your loved ones, life insurance and annuities are two important tools to consider. But what exactly is the difference between the two? We’ll discuss how both types of protection work as well as the key differences.

What is life insurance?

Life insurance is a financial product which provides a safety net for your family and/or loved ones if you pass away. It’s an agreement between you and the insurer where you pay a monthly premium for cover. In exchange, a lump sum payment is made to your family/loved ones upon your passing.

This payment can help cover funeral expenses, outstanding debts, mortgage payments, and provide financial support for your family during a difficult time.

As with any type of financial product, life insurance has its own pros and cons. That said, there are a number of factors that could define the effectiveness of cover such as the type of policy.

There are two main types of life insurance policies – term and whole:

• Whole life insurance provides protection for the rest of your life, as long as you continue to pay the premiums. It can also include a cash value component that grows over time, which you can borrow against.*
• Term life insurance, on the other hand, provides protection for a specific term (usually between 5-50 years). If you pass away during the term, your family/loved ones will receive the death benefit. However, if you outlive the term, the policy expires and no benefit will be paid.

What is an annuity?

An annuity is a financial product that provides a stream of income for a specified course of time or for life.

The concept is simple: you make an initial investment, and in return, you receive regular payments for either a set period or for the rest of your life. This can provide peace of mind knowing that you will have a steady stream of income regardless of how long you live. They are often used as a way to protect against outliving your savings and ensure financial security in old age.

There are different types of annuity, such as:

• Lifetime annuities: Provides regular payments for the rest of your life, no matter how long you live.
• Fixed-period annuities: Provides regular payments for a specified period of time, such as 10 or 20 years.
• Deferred annuities: Allows you to make an initial investment and receive payments at a later date, such as in retirement.
• Variable annuities: Allows you to make investments in various funds, with the potential for higher returns but also higher risks.

Life insurance vs annuity

While both life insurance and annuities provide financial protection, they serve different purposes. Life insurance is designed to provide a lump sum payment to your family/loved ones when you die. While annuities are designed to provide an income during retirement or for a specified time.

Another difference is that life insurance premiums are typically paid on a regular basis, whether monthly or annually. While annuities are usually purchased with a lump sum payment or through regular contributions over time, depending on the type of annuity.

In short, life insurance:

• Provides financial protection for your family/loved ones in the event of your death.
• Can help cover funerals, debts, and ongoing living expenses for your family/loved ones.
• Can provide peace of mind knowing that your family/loved ones will be supported financially.

Annuities, on the other hand:

• Provide a steady flow of income for a specified period or for life.
• Can protect against outliving your savings in retirement.
• Can be purchased with a lump sum payment or through regular contributions over time.

Which is right for you?

It all boils down to your specific financial goals and needs.

If you are primarily concerned with ensuring that your loved ones are financially protected in the event of your death, then life insurance is likely the right choice for you. Or if you want to protect your mortgage and ensure that your family can continue to make mortgage payments, term life insurance may also be a good option.

On the other hand, if you are focused on ensuring a steady stream of income during retirement or for a specific period of time, an annuity could be the right choice for you. They can also provide a sense of security, knowing that you will have income regardless of how long you live.

Both can play important roles in your overall financial plan. Therefore, it’s important to carefully consider your needs and goals before making a decision.