8 Major Differences Between Annuity and Life Insurance

8 Major Differences Between Annuity and Life Insurance

In the United States annuity is an insurance product that each state accepts and manages. Insurance companies sell an annuity. It is a contract set between you and the insurance company. This policy is planned by using a mortality table and guaranteed by the insurance company. In this article, we will see what is an annuity and the differences between annuity and life insurance.

At first, you invest a bulk amount of money to the insurance company as a premium. After the policy is issued you can choose to receive money for a selected period of time. Like 10 years or 20 years or a lifetime. The money that you have invested grows tax-free. But when you start receiving the payments it is subjected to income tax. This procedure provides you with a guaranteed income for the future. This is a payment made at a fixed interval. Especially it is taken by those who are retired or about to retire.

There are different types of Annuity available in the Insurance sector. Annuity holds more than 2 Trillion Dollars’ worth of amount worldwide. You can receive a higher amount of payments if you choose not to get back the principal that you have invested. You can also discontinue the contract to get a bulk payment after discontinuing the policy. It depends on which type of Annuity you are taking.

Also read: Complete Guide to Life Insurance and its benefits!



Let’s See the Various Types of Annuities!

Mainly there are five types of annuities. They are Fixed Annuity, Variable Annuity, Fixed-Indexed Annuity, Immediate Annuity and Deferred Annuity. Each of the annuities has a different level of risk factor and payment outcome is also different. So let us discuss different types of annuities.


#1: Fixed Annuity:

In this type of annuity interest rates are fixed by the insurance. They usually give interest rates that are higher than the bank’s rate of interest. These type of annuity is very popular among the retired persons. People who are at the verge of retirement also prefer this policy type.


#2: Variable Annuity:

In this type of annuity, the insurance company invests the money in stock markets or mutual funds.  So the interest rate here is not fixed. It can be higher sometimes or sometimes it can be lower. This entirely depends on how the market is doing.


#3: Fixed-Indexed Annuity:

This annuity is usually fixed annuity but with variable interest rates. In this type of annuity, when the market index like the S&P 500 is positive the interest is added with the annuity. Usually, they offer a minimum benefit. Although it cuts down your added return. It gives you a minimum guaranteed benefit all the time.


#4: Immediate Annuity:

It is just opposite of life insurance. In life insurance, you pay a regular premium. And after death, the beneficiary gets the bulk amount of money. Here you pay a large amount of money at the starting of the policy and the insurance company gives you payments at certain intervals. In this policy the payment is usually higher as the principal that you are paying will not be returned. This type of annuity is popular among retired persons. As they are willing to give up the principal in return of higher lifelong income.


#5: Deferred Annuity:

In this type of annuity, the payment is put on hold for a certain period of time. And that is more than a year. It is better for those who do not need money immediately. But after retirement, they can start receiving payments when they actually need it. In this type of annuity, the interest rates are also high because the company can use your money for a longer period of time. Because you don’t need it right now.



Here are 8 Differences Between Annuity and Life insurance

Annuity and life insurance are just the opposite of each other. Let’s see the major differences between an annuity and life insurance:


#1: The opposite Fundamentals:

In an Annuity, you gradually withdraw money from a Policy where you have invested a large sum of money earlier. But in life insurance, you invest money from time to time and accumulate fund.


#2: Who is the beneficiary?

In Annuity, the contract is for your own personal gain whereas in Life Insurance it benefits your dependents.


#3: When do they do the payment?

In an Annuity policy, the payments usually stop at the time of your death. But the insurance company pays your dependents after your death in life insurance.


#4: Why do we do annuity or life insurance?

An Annuity is a protection so that you don’t outlive your assets. But Life Insurance is a protection against a shorter life span.


#5: The method of premium calculation:

We calculate the Annuity premium on the ground of longevity. But the mortality of the Insurer is the basis of calculation in life insurance.


#6: At what age do we need to buy them?

Usually, people buy an Annuity at the verge of retirement say when he or she is between 55-60 yrs. But we do Life Insurance at the age of 25-30 yrs.


#7: How does it do payments?

Type of payment in Annuity is Lifelong. But in the case of Life Insurance, the payment is a single sum payment after your death.


#8: Tax Benefits:

In Annuity, the money accumulated is tax-deferred. But it is not in the case of term Life Insurance.

Also read: 8 Major differences between insurance and assurance 




So to sum up the discussion we can say that it is better to check different types of Annuity policies offered by a different type of Insurance companies like Allianz Life and AIG Life. It is always a good choice to discuss with a financial advisor before you buy any policy. You can compare the policies on various websites also. An annuity is a good policy. It ensures if you live a longer life, you don’t outlive your assets. A lot of people invest in Annuity nowadays. But it is better to take advice from a knowledgeable person before jumping into any decision.

If you like this article on differences between an annuity and life insurance, then please share it with your friends. If you want to know more about Annuity feel free to comment below in the comment box.

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