Life insurance annuity is a term that most people think exists, but from today, please note that this is not an industry-standard term. Instead, life insurance stands as an insurance product on its own, and annuity is an insurance product on its own.
You’re probably thinking, if there is nothing like a life insurance annuity, what are the similarities and differences between life insurance and annuity?
Similarities Between Life Insurance and Annuity
1. Both are offered by insurance companies: if you want to buy an annuity or life insurance, these are products you will get from an insurance company. Since these two are standard products in the insurance sector, insurance companies must abide by the state laws and regulations on how each is sold to consumers.
2. Both have death benefits: the primary reason for taking a life insurance is its death benefit feature. This is a financial benefit paid to your beneficiaries in the event of your death. The primary reason for buying an annuity is for its guarantee of lifetime income. What happens in the event you die prematurely? This is where the death benefit of your annuity comes in. This death benefit is paid to your named beneficiaries.
Difference Between Life Insurance and Annuity
The primary intent of buying life insurance is to protect your family’s lifestyle after your demise. People who buy life insurance want assurance that their family will not be left with strangling financial obligations that would lower their standards of living after the death of their breadwinner.
On the other hand, an annuity is intended to pay a lifetime income to the policyholder. Annuities are taken by people who are optimistic about living long and possibly outliving their retirement benefits. Thus, having an annuity at the side guarantees such an individual ability to afford life even when they will be too old for any job.
2. Nature of payout:
For life insurance, the payout is a death benefit. This lump sum amount is payable to the named beneficiary after the policyholder’s demise. The lump sum payable to the policy’s beneficiaries depends on the type of death benefit that the policyholder had chosen before their death.
There are three types of death benefits;
- Accidental Death Benefit (ADB),
- Accidental Death & Dismemberment (AD&D), And
- All-Cause Death Benefit.
On the contrary, the annuity payout is a recurrent payment made for the policyholder’s lifetime or the predetermined timeframe. Some annuities have more payout options than others.
Note: Payout options are also likely determined by the insurance company that sells an annuity to you.
Some payout options you can choose from while buying your annuity are fixed period payout, fixed amount payout, joint and survivor life payout, life only payout, life with period certain, and lump sum payment payout where applicable.
3. Income aspect:
If you buy life insurance, your policy’s beneficiaries will not get an income stream upon your demise. If your beneficiaries are not careful with managing the lump sum payout, they could face financial challenges that you were trying to cushion them from.
On the other hand, an annuity is meant to generate income for the policy holder from a future date. They can live comfortably knowing there is a regular payment they will receive on a future date upon their annuity implementation.
4. Life benefit:
Life insurance protects the holder’s beneficiaries after the policyholder has died. Thus, it does not benefit the policyholder. However, some policyholders may decide to cash out their life insurance. This happens when a policyholder feels their beneficiaries may not need death benefits.
Contrary to life insurance, annuity guarantees the policyholder that they will benefit from it while alive. Unless they die prematurely before their retirement, the payout from an annuity exists as a guarantee for the policyholder.
Should I Buy Life Insurance or Annuity?
Well, it depends on what you want and who you want to benefit. If you want to cushion your children or spouse from financial challenges in case of your demise, you are looking to buy life insurance. Their lifestyle will not be adversely affected by your death.
If you are looking to establish a steady source of income after you have retired, then you are considering an annuity in mind. Such an annuity can still benefit you and your descendants if you choose a joint and survivor life payout option.
Can I Have Both Life Insurance and Annuity?
Absolutely, you can have these financial products if you wish. It all trickles down to your personal preferences. You may have many financial goals that neither life insurance nor annuity can meet single-handedly. If you are not willing to sacrifice any of these goals in your financial planning, you can get life insurance and annuity.