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Updated: Mar 14, 2024

Life Insurance vs. Annuities: How Are They Different?

Learn the differences between life insurance and annuities when it comes to beneficiaries and overall financial value
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If you’re drawing up your retirement plan, you may have been subjected to a sales pitch for annuities and life insurance. If so, you’re definitely not alone.

Life insurance and annuities may offer high commissions to the people that sell them. Someone about to retire with a significant asset balance is a prime target for the sales pitch. 

These products are generally sold based on fear and uncertainty about the future. This can be a dangerous combination to the person being sold to.

That said:

These products do have legitimate purposes. They could be part of a suitable financial plan for specific individuals.

Here’s what you need to know about life insurance and annuities, why they’re normally discussed together and how to find out if they’re a good fit for you.

Why Are These Products in the Same Conversation?

You may be wondering why life insurance and annuities are frequently discussed together.

Sadly, the reason isn’t necessarily a good one.

Available from the same place

You can usually buy a life insurance and annuity contract from the same insurance company.

Additionally, insurance salespeople see them as a great way to earn a hefty commission.

Tax-free conversion option

Another reason these products may be talked about together is a tax-free conversion option.

You may be able to convert a permanent life insurance policy to an annuity without paying taxes.

This may be possible through a 1035 exchange in some instances. 

Talk to a tax professional to learn more about this option. You may also want to consult a fiduciary financial advisor. They can give an unbiased opinion on whether it is a good idea for your situation.

May be fitting for similar situations

Some people may find one or both of these products beneficial for their risk tolerance and situation.

That said, they shouldn’t be the default option offered to everyone willing to listen.

To understand why you need to know how each product works.

Basics of Life Insurance and Annuities

These two products both have significant differences. They’re used for different purposes. Here is a basic overview of each type.

Life insurance

Life insurance protects your loved ones. It offers a death benefit payout if you die during the time the life insurance policy is in effect. 

Your beneficiaries often receive the benefit tax-free. There are exceptions that may require you to pay tax, though.

There are several types of life insurance plans to choose from. When you’re younger, term life insurance usually makes the most sense. 

This insurance only lasts for a set period, called the term. Your beneficiaries only receive a death benefit if you die during the term. 

After the term expires, the policy expires. If you die after the policy expires, you typically receive nothing.

The limited term may seem problematic. It shouldn’t be, though. 

During your policy term, you should focus on building assets. That way, you won’t need life insurance after the policy expires.

The other main type of life insurance is a permanent life insurance policy. These have many names. Varieties include the following and more:

  • Whole life insurance
  • Universal life insurance
  • Variable life insurance

These policies could be sold to you early in life. They’re often marketed as a way to invest for your future that also guarantees an eventual death benefit. 

These policies never expire unless you quit paying premiums or violate the policy. They’re in effect for your whole life. 

This sounds beneficial, but it comes at a cost. Permanent life insurance is often much more expensive than term life insurance. 

Life insurance companies are guaranteed to pay out the death benefit as long as you keep the policy active. That means these companies have to charge enough to cover your eventual death benefit plus profit for the life insurance company.

Prices are also higher because life insurance companies offer hefty commissions to salespeople for selling permanent life insurance policies.


In general, annuities offer some form of guaranteed income in the future.

In many cases, this is a stream of payments. 

Sometimes the payments last for a set period. In other instances, annuities may result in payments until death. 

To buy an annuity, you generally make several large premium payments or a single lump-sum premium payment up front. 

The benefit payments may start immediately if you’re already retired. Alternatively, they could begin at a future date if you’re younger.

Annuities can decrease the uncertainty of outliving your assets in retirement. The contract provides a stable income you can rely on.

Unfortunately, the income may not seem as good as initially anticipated. If the annuity payments don’t keep up with inflation, your buying power could decrease over time. 

As with life insurance, there are several types of annuities. They range from simple to incredibly complex. 

Standard options include a variable annuity, indexed annuity, deferred annuity, fixed annuities and many more. Each financial product is designed to meet different goals.

There are several factors to consider before purchasing an annuity. 

For instance, current interest rates can impact the benefits you receive from an annuity. Lower interest rates at the time of purchase usually result in smaller payouts.

Differences Between Life Insurance vs. Annuities

Many differences exist between life insurance and annuities. 

In the big picture, there is one significant difference you should focus on.

You can explore the more nuanced differences after you choose which primary benefit you need.

Who receives money

Life insurance pays your beneficiaries after you pass away, assuming it is still in place. You typically do not benefit from a life insurance policy yourself before you die.

Granted, there are exceptions. You may convert a permanent life insurance policy to an annuity or use the cash value. 

However, the primary purpose of a life insurance policy is to pay a death benefit to your beneficiaries.

Annuities, on the other hand, provide you a stream of income while you’re still alive. 

This is the main focus of an annuity. Your beneficiaries may receive some money as a death benefit depending on the annuity type. It isn’t the main goal, though. 

When life insurance makes more sense

Life insurance makes more sense when you want to provide money to your loved ones after your death. 

As long as the policy is in effect when you die, your beneficiaries should receive a death benefit according to the policy terms.

When an annuity makes more sense

An annuity makes more sense when you need to provide income for your own future. If you don’t want to worry about volatility in investment prices, some annuities can reduce that risk.

Since annuities provide an income stream, they could provide enough for you to live on in retirement.

You must have the annuity structured in the correct way to protect against inflation, though.

Should You Have Both?

In some cases, it may make sense to have both life insurance and an annuity. 

Some people may want a stream of income for themselves and want to pass money on to heirs.

In this case, they could use an annuity and a permanent life insurance policy to accomplish both goals.

That said:

This solution may only be the best option for extremely risk-averse people. 

Essentially, you’re passing the risk on to an insurance company. Insurance companies know this. They price their products accordingly. 

The products must cover the expenses of running the insurance business plus profit for shareholders. You pay for these in your premiums.

That means you could be leaving a lot of money on the table. 

Could do better with your own investing

Those fortunate enough to do so may be able to self-insure by investing to build assets. They can still buy term life insurance to provide a death benefit while building assets.

Investments can also provide a stream of income later in life if you structure them correctly.

Consult a Fee-Only Fiduciary Financial Advisor

Deciding whether you should buy an annuity, life insurance policy or both can be tricky. 

Normally, you go to a salesperson’s place of business to buy products. For instance, you head to the car dealership to buy a car.

Buying a car is relatively straightforward. Most people understand the process. They also understand exactly what they’re buying.

Financial products, such as life insurance policies and annuities, are much more complicated. Unless you’re a trained professional, understanding exactly how these products work is often very difficult.

To make matters worse, the salespeople earn hefty commissions. That means salespeople are going to try to sell you these products whether you need them or not.

Rather than unnecessarily buying an expensive financial product, you can consult an unbiased individual.

A fee-only fiduciary financial planner can give you unbiased advice based on your situation. 

These professionals don’t receive commissions for selling life insurance or annuities. Instead, they’re paid by you directly. 

Some charge an annual fee while others charge by the hour for their advice. 

If you already have a fee-only fiduciary financial planner, they may also charge based on the assets they manage on your behalf.

The key is there is no commission check influencing a fee-only fiduciary financial advisor to recommend one product over another. They can honestly tell you which provides the most value for you.

In the best-case scenario, this advice could easily save you tens or hundreds of thousands of dollars.