Life insurance can help protect you and your family.

What is the Difference Between Life Insurance and Annuity?

Life Insurance vs Annuity

We all know that financial planning is important, but it is not always clear what different schemes and policies are, nor which is the right option for our individual situations. So, we thought we would start by looking at life assurance and annuities and hopefully provide some clarity for you. Let's take a look at life insurance vs annuity.

Both annuities and life insurance policies provide for your financial future, but they do that in different ways.

Life Insurance

Life insurance policies are designed to protect anyone who depends on you for financial support in the unfortunate event of your passing. There are two key types of life insurance. These are whole and permanent, and term.

Whole or permanent life insurance policies are those which are in place for the remainder of your life, assuming that you do not let the policy lapse.

Term life policies are valid for a specific period of time or term. If you outlive this term, usually a period of 10 to 30 years, then your beneficiaries will not receive any death benefits.

Pros of Life Insurance

Peace of Mind

Life insurance can provide peace of mind from knowing that your loved ones have been saved from financial hardship when they lose you. If you are married, then you might worry about how your spouse would cope with paying for the house and bills without your income. If you are a parent, you might be concerned as to how your children will pay for college if you are not there. Or it might be that you want to spare your loved ones from having to find the money for funeral expenses.

Tax Benefits

Life insurance provides a tax-free death benefit. So, this means that your spouse or children may be able to avoid estate taxes if the policy is carefully set-up with this in mind.

Affordable Coverage

Life insurance can be very affordable, depending on your personal situation and the type of policy you choose. Term life tends to be the cheaper option and many insurers have policies for clients with specific needs, such as having diabetes, or if they used to be smokers.

Cons of Life Insurance

Term Life Insurance is Temporary

Hopefully, you will outlive your term life insurance policy, but if you do not, the policy comes to an end and no payment is made.

Higher Premiums for Whole of Life Cover

Whole of life cover is completely guaranteed and it just keeps on going. Now, while this is why you chose it, the insurance company also knows that they are going to have to pay out at some point in the future. So, to make sure that they are not out of pocket, the premiums will be set up so that if you live an average lifetime, then you have paid enough in to put the insurance company into profit.


Annuities are an insurance product offered by insurance companies. They are a long-term contract where in exchange for investing your money, you receive income in the form of regular payments. The two most common types are immediate and deferred.

An immediate annuity is called this because they pay out shortly after you pay the premium, usually between 30 days and a year later. The premium itself can be paid in one lump sum, or you can often arrange to make installment payments.

With a deferred annuity, the money you pay in is invested until you decide to take withdrawals.

Pros of Annuities

Income for life

Perhaps the strongest reason for considering an annuity is that it generally provides you with an income that you cannot outlive (do be aware that there are some types which only payout for a certain period of time, so check the paperwork carefully).

Deferred Tax Payment

Most retirement investments require you to pay tax when they reach maturity. With annuities, however, you do not owe a cent to the government until you withdraw the funds, giving you much more control.

Guaranteed Rates Option

Usually, the payout from annuities depends on how the market performs, but you can opt for a fixed rate agreement so that you will know what the rate of return will be for a specified period of time.

Cons of Annuities

High Fees

One of the biggest problems with annuities is that the set-up and management fees can be very high. They are often sold through agents, so you end up paying their commissions, usually through an upfront fee. Buying directly from the insurance company can help to avoid this cost, but it will probably limit the advice you receive to that company's products.

Even if you manage to avoid the commission fee, you could find that you are still facing annual expenses in excess of 2% of the contract value.


If there is a good rule to follow when making financial decisions, it is to avoid buying if you do not fully understand the product. Annuities are a really strong example of this. Over the last few years, we have seen a whole range of variations on the annuity being introduced onto the financial market. Some come with conditions that are so complex that they require some serious financial acumen to decipher.

How to Pick the Right Plan for You

The key to finding the right option for you is to have real clarity on what the purpose is. If the primary goal is to help others pay for your final expenses, any bills and have some money left to live on, then your best bet is life insurance. If you are looking for something which offers you an income in retirement, then annuities may be an option.

Life Insurance vs Annuity: Which Will You Choose?

In a nutshell, for life insurance vs annuity, life insurance protects your loved ones if you die prematurely, annuity protects your income if you live longer than expected.