What Is the Difference Between an Annuity & Life Insurance? | Virginia Benefit Advisors

An annuity and life insurance are insurance products. The primary difference between an annuity and life insurance is when payment is made. Annuities pay a set amount monthly, quarterly or annually to meet future financial needs, usually in retirement. Life insurance pays the value of the policy at the time of your death. Several types of annuities and life insurance policies exist. A wise investor will evaluate all options before making a monetary commitment.

Annuity Types

Annuities can be broken down into deferred payment and immediate payment types. Think of an immediate payment annuity as creating your own pension. You pay a lump sum to an insurance company and the insurance promises to pay you a fixed dollar amount for as long as you live. A variation on the immediate annuity distributes the amount over a fixed time period such as 10 or 25 years whether you are alive or not. A deferred payment annuity allows you to make payments into your annuity over a period of time after which you will begin receiving payments. The insurance company invests the money you pay into the annuity. Deferred annuities usually offer a death benefit to your beneficiaries. Deferred annuities have initial and annual fees. An annuity offered by most insurance companies includes the combination of a fixed rate of payment with variable increments based on investment performance. An example is the equity-indexed annuity that links interest earnings to a market index.

Life Insurance Types

Life insurance contracts may be whole life or term life. Whole life policies pay the face value of the policy to your beneficiaries at the time of your death based on premiums paid over several years. The required premium may be paid in a lump sum—called a single premium whole life—or over a period of time such as 10, 20 or 30 years. Term life insurance has a face value from the time of purchase, but only for the duration of the term that may be five, 10, 20 or more years. After the period or term expires, the policy has no value.

Tax Implications

A percentage of immediate payment annuities is taxed as ordinary income but not all. Differed annuities are usually tax-free—in reality, tax deferred— during the savings period and taxed as income when the money is withdrawn. Life insurance benefits are not taxed as income to the beneficiary and premiums are paid with after-tax dollars.

Questions to Ask

Ask your broker or insurance agent how much your monthly payments will be if purchasing any insurance other than immediate annuity or lump sum whole life. Find out what happens when you die. Ask for information about the company underwriting the insurance and its stability and reputation. Ask for quotes, benefits and issues with several types of insurance options and compare against your expected needs and payment ability. Ask about rates and benefits from several companies.


Most immediate annuities are the property of the insurance company that pays you as agreed in the contract. You will have difficulty getting money out in a payment that deviates from the agreed payout. Unless you purchase additional insurance services, an annuity stops paying when you die. The security of your investment in either an annuity or life insurance is contingent on the continued existence of the insurance company. To protect your insurance benefits, each state has a guaranty fund. The amount insured varies by state but averages around $300,000 in life insurance death benefits. Annuity Advantage offers a list of approximate values as well as links to each state’s regulatory agency to get current information.

By Barbara Brown
Originally Published By Livestrong.com