Which is better? Life Insurance vs Annuity

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Life insurance and annuities are both useful financial tools for planning for the future. It is important to have a basic understanding of each before determining which will work out best for your specific needs. If you are in the market for a policy, start comparing life insurance rates now by using our FREE tool above!

What is Life Insurance?

Life insurance is designed to provide your loved ones with an ample amount of money after your death, also known as a death benefit. When you have loved ones that depend on your financial income, purchasing a life insurance policy can help provide for them even after your death. Life insurance can help you and your loved ones in many different ways, including:

  • Taking care of your funeral expenses
  • Paying off your mortgage
  • Financing your children’s education
  • Keeping a business running
  • Supplementing your income to remain a two-income household
  • Creating a source for loans and withdrawals during hardships
  • Different types of Life Insurance

When purchasing a life insurance policy, you have many options to choose from. What type of life insurance, the amount of coverage, and how much you can afford are all very important things to consider before purchasing a policy. The two most common types of life insurance are term life and whole life.

  • Term Insurance

Term life insurance is usually purchased to provide financial coverage over the course of a specific period of time, which is usually 10 or 20 years. During that time, the premium is guaranteed to be locked in at the same price. This type of life insurance does not build cash value, so you can not borrow against your policy. After that period, you may be able to opt in for extended coverage, but the premium rate is usually substantially higher. Overall, term life insurance is usually cheaper than whole life insurance.

  • Whole life insurance

Whole life insurance is guaranteed to provide lifetime financial coverage from the moment a policy is purchased on condition that premium payments are continually made. Unlike term insurance, whole life builds cash value (which is tax deferred) over the course of the life of your policy. It is sometimes used as a living benefit, in which policyholders have disability protection, a guaranteed cash value, dividend incentives, protection from creditors, and the option to borrow against their policy. While the premiums tend to be higher than term life insurance, the benefits pay for themselves.

Doing your research and shopping around is the best way to find what is right for you. With the right life insurance benefits in place for the future, you can rest assured that your most important goals will be met.

What is an Annuity?

An annuity is a type of insurance product that is used to prepare you financially for retirement. It is great for investors looking for a steady stream of income for the future. An annuity works by the investor paying a lump sum of money to the insurance company that is left to grow until your retirement. Depending on the arrangement that you have with the insurance company, you will receive payments from your investment plus the rate of return throughout a specified period of time.

Different types of Annuities

Like life insurance, annuities offer different options for you to choose from. It is important to analyze your needs to determine which option will be the best for you. The two most common types of annuities are:

  • Annuity with Period Certain

By choosing the annuity with period certain, you are opting to receive higher monthly payments than you would with the life annuity option. The only disadvantage of this option is that these payments are only for a set period of time, and you have the risk of running out of money before your death. For example, a 65-year-old man decides to start receiving payments on his 10-year period certain annuity. He will receive monthly retirement income from age 65 to age 75; however, if he lives past 75, he will not receive any more income from the annuity.

  • Life Annuity

The life annuity option is the most selected option when it comes to retirement savings. Whereas the annuity with period certain has the ability to run out of money, the life annuity option guarantees to pay out monthly payments over the course of your entire life.

So Which is Better, Life Insurance or an Annuity?

The truth is life insurance and annuities are both useful financial planning tools. It is hard to say which is better because it depends on what specific needs you have in mind for your financial future. Doing a comparison of the advantages and disadvantages of each may be of help in choosing which is best for you.

Death Benefit

Both life insurance and annuities have death benefits. However, when comparing the two, the death benefit amount could be on a whole different spectrum. With life insurance, the death of the insured will yield the face value of the death benefit.

With an annuity, the death benefit is whatever you have paid into the annuity plus the rate of return.

If you paid in $500 into an annuity before your death, then your beneficiary would receive $500 plus the rate of return. If you paid $500 worth of premiums into your life insurance policy and the death benefit was $150,000, then your beneficiary would receive $150,000. As you can see, the difference in death benefits could be quite substantial.


Some life insurance policies have the ability to accumulate savings. Whole life insurance builds cash value, whereas term life insurance only has the ability to provide insurance coverage. When comparing whole life insurance and annuities together, they both have savings aspects. Because annuities accumulate funds quicker than life insurance policies, you may want to consider an annuity if saving money for retirement is your goal.

Taxation of Death Benefits

There are tax-deferred benefits for both life insurance and annuities. With any type of life insurance, your beneficiary will receive a tax-free lump sum in the event of your death. With an annuity, however, any death benefit received becomes taxable, including the growth on the money you invested.

Tax-Free Growth

Both life insurance and annuities have tax advantages in that their values grow tax-deferred. However, with an annuity, there are penalties for taking out early distributions. Because an annuity is solely designed for retirement, the IRS requires that you pay taxes plus a 10 percent penalty on the interest if you take out the funds before your reach age 59 1/2. In the other case, if you surrender your life insurance policy at any point, you are required to pay taxes on interest, but there are generally no added penalties.

Borrowing Money

Because whole life insurance builds cash value, you can use it as collateral or borrow money against your policy tax-free. The same can not be said for an annuity. An annuity neither allows using its funds for collateral or borrowing money.

There are different methods of payment such as periodic payments, paying interest only or if there’s enough cash value, you can allow the contract to pay its own interest by borrowing against cash value.

Both the annuity and the life insurance policy can be useful financial products. Taking advantage of the best one is as simple as determining your own needs. If you have a family that depends on your financial income, a life insurance policy may be the best option for you. If you are solely looking to plan to fund your retirement future, then an annuity may be a better option for you. Each has their own benefits and drawbacks and pitfalls, however, comparing the advantages and disadvantages of life insurance can help you make an educated decision. Also, each insurance company will have its own set of perks and disadvantages, so it is important to look at multiple places and use an online comparison tool to see multiple offers. Start comparing life insurance rates now by entering your zip code in our FREE tool below!

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