An annuity is a financial instrument that pays out a fixed sum of money over a period, typically for the rest of the holder's lifetime. A life insurance plan is an arrangement in which an individual pays a regular premium to an insurance company in exchange for protection against risk to their life or risk to their income due to injury or illness.
Annuities are often sold as investments, whereas life insurance plans are not. The main purpose of annuities is to provide guaranteed retirement income, whereas the main purpose of life insurance plans is to protect against the risk of death and/or loss of future earnings due to disability or injury.
Both annuity and life insurance plans have a lot of differences from each other. This article aims to compare these two insurance plans in terms of the features, benefits, and costs and how to buy the best plan for you.
What are Annuity Plans?
Annuities are long-term investments with a fixed rate of return. They are typically used by people who want to generate income in retirement or by people who want to provide for their future heirs. Some annuity plans also offer life insurance protection, which can help protect your beneficiaries from the financial consequences of your death.
Types of Annuity Plans
There are two main types of annuity plans Deferred Annuity Plan and Immediate Annuity Plan.
Deferred Annuity
A deferred annuity is a type of annuity contract, which provides for periodic payments to be made in the future. A deferred annuity may provide for payments to be made at specified intervals (monthly, quarterly, semiannually, or annually) or at the end of a specified period (10 years). The amount of each payment and the date on which it will be paid are both determined by the individual’s age and life expectancy.
The advantage of a Deferred Annuity plan is that it allows you to defer taxes until you start withdrawing money from your account. This can help you save more money as you don't need to pay taxes on interest earned while your money is invested in your Deferred Annuity plan account.
What are Life Insurance Plans?
Life insurance is a contract between an individual and an insurance company that guarantees the individual or their dependents will receive a sum of money upon the death of the insured. The cost of life insurance plans varies depending on how much coverage you purchase, and it can also depend on your age, health, and other factors.
Types of Life Insurance Plans
There are two main types of life insurance plans: Term Insurance and Whole Life Insurance.
Term Insurance
A term insurance plan is a type of life insurance in which the insurance company agrees to pay a certain amount known as the sum assured in case of the death of the policyholder within the term mentioned in the policy copy. The period in term life insurance can be anywhere between 5 years to 60 years depending on the type of life insurance term policy. If the policyholder survives the term, no survival benefit would be provided to the policyholder under the term insurance policy.
Whole Life Insurance
A whole life insurance policy is the extension of the term insurance policy. In whole life insurance, the insurance coverage is provided till the death of the policyholder or till attaining 99 years of age. Since the coverage is for a complete lifetime, it is known as whole life insurance. While the term insurance policy has a particular period for which the coverage is offered the whole life insurance policy is covered for the lifetime of the policyholder. Survival benefit would be possible under the whole life insurance policy in rare cases if the policyholder survives the policy period.
Difference between Annuity Plans Vs Life Insurance Plans
The table below compares the two plans on various factors. Here are some of the key parameters based on which they differ from each other:
| Factor | Annuity Plans | Life Insurance Plans |
| Definition | Annuities are long-term investments that have a fixed rate of return. | A life insurance plan is a type of insurance plan that helps to protect your family in the event of death. |
| Types | Deferred Annuity
Immediate Annuity | Term Insurance
Whole Life Insurance |
| Payout | Pays out over a lifetime | Pays out at the time of death |
| Coverage | Provides income and small life cover as well | Provides life coverage only |
| Tax | Payouts are taxable | A life insurance plan can be fully tax-exempt |
| Death Benefits | Death benefit rider is an optional | It offers death benefits |
| Premium | Premium based on the life expectancy | Premiums based on age, health, lifestyle, etc. factors |
| Payment Amount | The payment amount is determined at the time of purchase and is typically fixed | life insurance policies can be purchased with variable premiums |
| Interest Rates | Annuities often offer higher interest rates than life insurance policies | Low as compared to annuity plans |
Annuity and Life Insurance Plan: Which is the Right Plan for You?
Annuities and life insurance plans are two different types of investment that are often confused. However, they both offer different benefits to the investor. To decide on which plan is right for you. Let’s take a closer look at what these two products offer.
Annuity Plans are a type of investment that provides a steady income for retirees. These plans are designed to provide retirement income, and they do not have any cash value. On the other hand, Life Insurance Plans are designed to protect your family in case of an unfortunate event by providing a financial safety net.
Annuity plans provide guaranteed payments for life or until the annuitant dies. The payment amount is determined at the time of purchase and is typically fixed, while life insurance policies can be purchased with variable premiums. Annuities often offer higher interest rates than life insurance policies and they may also offer tax-deferred growth on earnings.
The two plans also have a lot of similarities. Annuities and life insurance plans both offer a lump sum of money at the end of the term or policy period that is guaranteed by an insurance company. Both annuities and life insurance plans can be used as investments because they offer tax advantages to the investor if they qualify for retirement purposes.
They also allow investors to withdraw money before the end of their term or policy period without penalty, but there may be some restrictions on how much money can be withdrawn in one year or over a certain time frame depending on your age and other factors. In simple words, Life insurance policies protect your family if you die prematurely while the annuity plan protects your income if you survive longer than expected. So choose the plan as per your need & requirement.
Conclusion
The key to selecting the best annuity or life insurance plan is to find out what you need. Annuities are designed to provide a steady stream of income for retirement. Life insurance plans are designed to protect your family from financial hardship in the event of your death.
Some people may need both, while others may only need one type of coverage. It is important that you understand how each type of plan works and what it can do for you before you make a final decision on which one is right for you.
If you are trying to choose between an annuity and a life insurance plan, think about your objective for purchasing the plan. If you want to protect your loved ones in the event of your death, then life insurance would be best for you. On the other hand, if you are looking for an investment with guaranteed returns and no risk, then annuities would be better than life insurance.