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Life insurance and annuities are similar, they are not the same. Both can provide income during your retirement years. But, if you’re strictly looking for retirement income, an annuity is the better choice.

Unlike an annuity, life insurance is used to provide financial stability and security for your dependents and beneficiaries. These policies are only beneficial after you die.

Here’s what you need to know about life insurance vs. annuity in planning for your later years.

Purpose of life insurance vs. annuity

Life insurance plans are designed to provide income to your beneficiaries if you die sooner than expected. While there are some policies that offer income-earning and cash value options, along with living benefits, these aren’t the main functions of life insurance.

The sole purpose of life insurance is to care for your loved ones after your death. Most policies are used to pay for end-of-life as well as funeral expenses.

On the other hand, annuities, which are provided by insurance companies, are strictly meant to provide financial stability for retirees. Annuities provide retirement income to the owner if they lived beyond the expected lifespan. They provide tax-deferred savings with payments paid on a set schedule.

Plan options

Life insurance plans are divided into term life or whole life insurance. A term life policy covers a set period. On the other hand, a whole life insurance policy spans the policyholder’s entire life.

Annuities are available in several types, including:

  • Immediate
  • Deferred
  • Longevity

Immediate annuities are paid no later than one year after the premium is paid. Deferred annuities don’t pay out until a future date. Longevity annuities usually don’t pay out until the owner is 80 years of age. They’re designed to provide supplemental income after regular retirement savings have been depleted.

Choosing the right plan for retirement income

When determining whether a life insurance plan or an annuity is best, consider the purpose.

If you’re looking to provide financial security and stability for your beneficiaries, life insurance is best. A short term or whole life plan can be used to cover final expenses as well as any debt or bills that must be paid.

If you want a plan that offers reliable retirement income, an annuity is the only option. Annuities offer tax-deferred savings along with supplemental retirement income. Having an annuity greatly reduces the risk of outliving your savings.

In simplest terms, life insurance protects your loved ones if you die prematurely. Oppositely, an annuity protects your financial health if you live longer than expected.


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