Choosing Between Annuities and Life Insurance
Life insurance can help protect your family if something happens to you. Annuities are intended to build your savings for future retirement income. Both are important, but they serve different purposes.
This guide will explain the difference between annuities and life insurance, how each works, and why some families may choose both.
Quick Comparison
Here’s a simple side-by-side look at life insurance and annuities:
Life Insurance
- Purpose: Provides money to your loved ones if you pass away
- Payout timing: Paid to beneficiaries after death
- Tax basics: Death benefit is usually tax free
Annuity
- Purpose: Provides guaranteed income for your future
- Payout timing: Paid to you during retirement
- Tax basics: Growth is tax deferred and income may be taxable
How Life Insurance Works
Life insurance can help protect your family financially if you pass away. There are two main types:
- Term life insurance: Coverage for a set period of time, like 10, 20, or 30 years. Often used to cover a mortgage or replace income during working years.
- Permanent life insurance: Coverage that lasts your entire life and can build cash value over time.
Common Uses for Death Benefit:
- Pay off a mortgage
- Replace income
- Help with higher education costs
Read More: Your Complete Guide to Understanding Traditional Life Insurance
How Annuities Work
Think of an annuity like a paycheck you set up for your future self. There are several types of annuities, each with different features. Here’s a quick overview:
Fixed Annuities
- Provide predictable payments
- Offer a fixed interest rate with a guaranteed minimum rate specified in your contract
- Typically lower risk, but may offer lower returns
Variable Annuities
- Payments can vary based on investment performance
- Potential for higher returns, but also more risk
- Often include optional features for added protection
Fixed Indexed Annuities
- Returns are tied to a market index, such as the S&P 500
- May offer a balance between growth potential and protection
- Usually include a guaranteed minimum return
Qualified vs. Non-qualified Annuities
- Qualified annuities are usually funded with pre-tax dollars, such as from a 401(k) or IRA
- Non-qualified annuities are funded with after-tax dollars
Read More: Annuities 101: Your Guide to Retirement Income
Which One Fits Your Situation
It depends on your goals. For example:
- Young family: Life insurance may be important to protect your loved ones later.
- Near retirement: An annuity can provide steady income for life.
- Self-employed: Both can help; life insurance for family protection and an annuity for retirement income.
Some families choose both to cover all their bases.
FAQs
Is an annuity the same as life insurance?
No. Life insurance offers a death benefit and focuses on protection. An annuity converts savings into retirement income with growth potential.
Can annuities have a death benefit?
Yes. Some can include a smaller death benefit.
Do I need a health exam for an annuity?
Generally, no. Annuities are based on your age and suitability, not your health.
Why These Options Matter
Life insurance and annuities can help you feel more secure about your financial future. Life insurance can protect your family if something happens to you, while an annuity can provide steady income during retirement. Together, they can give you peace of mind knowing both your loved ones and your future are covered.
To learn more about WoodmenLife’s life insurance and retirement options, visit WoodmenLife.org.
Written by: Diana Henry, Senior Digital Copywriter
This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Read More
Your Complete Guide to Understanding Traditional Life Insurance
Term Life vs. Whole Life Insurance: Understanding Your Options
Annuities 101: Your Guide to Retirement Income
Understanding Fixed and Variable Annuities
Immediate vs. Deferred Annuities: Which Is a Better Fit for You?
Qualified vs. Non-qualified Annuities
Cashing Out an Annuity Early? What You Need to Know
Understanding Annuity Taxes and How They Affect You
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