Both a life insurance policy and an annuity policy may be appropriate for your long-term investment strategy. In essence, you buy a life insurance policy in case you die sooner than planned, while an annuity policy in case you live past your retirement funds. Both solutions have advantages and disadvantages. Annuity policy and life insurance policy are both agreements that are done between insurers and policyholders. Though both offer a tax-deferred growth, the similarities, however, end there.
Annuities are not the same as life insurance. In reality, they are made to fulfil the exact opposite goal. Unlike life insurance, which guarantees income if you die, an annuity guarantees income if you live longer than predicted. The following summary will assist you in determining which option is appropriate for your specific financial circumstances by presenting the key differences between them.
What is Annuity Policy?
An annuity policy is a type of investment that allows for regular withdrawals. An investor who wants to invest in an annuity should have a large amount of money to invest all at once, with withdrawals spread out over time. Annuities are tax-deferred financial instruments, which means you may save money on your withdrawals. They are primarily purchased as retirement plans to earn a guaranteed income when you retire.
What is Life Insurance Policy?
A life insurance policy, also known as life assurance, is an agreement drawn between an insurer and the insured, in which the insured agrees to pay an insurance premium in exchange for compensation from the insurer in the event of the insured’s loss, death, or critical illness. Depending on the contract conditions, the insured will be required to pay the premium in monthly instalments or in one lumpsum payment.
Annuity vs Life Insurance
Beneficiaries of both annuity policies and life insurance policies receive death benefits. Unlike bond or stock investments, however, annuities offer the security of a consistent source of income for the rest of your life. If you outlast other investments or sources of income, that guaranteed payment might come in useful. Annuities are contracts with an insurance firm that both parties must follow. Breaking the contract from either side – if at all feasible – can be costly.
On the other hand, Life insurance is a policy that protects you and your loved ones against financial hardships. Although both life insurance and annuities need a premium payment, they differ in terms of when, how, and to whom the benefits are paid.
Where annuities have the option of death benefit riders, the life insurance policy itself acts as a death benefit. This is because the funds in annuities are set on a periodic schedule, whereas the life insurance policy grows in value with time, depending hugely on the type of policy selected by the policyholder.
The Bottom Line
When it comes to retirement planning, investors should consider life insurance coverage or an annuity policy. An annuity offers a steady source of income throughout income, whereas life insurance protects your family members in the event of your untimely death.