Difference Between Life Insurance and Annuity

What is Life Insurance?

Life insurance is a way to make sure that your loved ones are financially taken care of in the event of your demise. The workings are quite simple, where you pay regular premiums and in return, the insurance provider pays the sum assured to your chosen nominee.

Even within life insurance plans, there are different types that you can choose from in India. Term insurance is the most affordable one and it covers you for a fixed number of years. If you die during the term, your nominee gets the sum assured. The other type is whole life insurance that lasts your entire lifetime and includes a savings component too. The next types are ULIPs (Unit Linked Insurance Plans) that are life insurance plans with a component of market linked remix pure life insurance with wealth generation to give a combination of both benefits. The next type is endowment plans that offer both savings and life cover. Another type is Money back plans which offers life insurance coverage and periodic returns during the policy tenure.

What is Life Annuity?

A life annuity is a plan that pays you a regular income after you retire. You either invest a lump sum or pay over time, and once the payout period begins, you will receive periodic payouts either monthly, quarterly, semi-annually, or annually, depending on what you choose.

Annuities work best when you want a steady income in your retirement years, especially after you retire.. You’ll find different types of annuities in India. The first is an immediate annuity plan, where payouts start right after investment. The next is the deferred annuity plan, where payout begins after a few years . There are also fixed annuities with predictable income, and variable annuities that change with the market.

In the annuity vs life insurance , annuity helps you survive old age by supporting your retirement, whereas policy benefits from life insurance plan helps your family financially after your death. Both serve different roles, and many people use both the plans for long-term planning.

How Does an Annuity Work?

The working of an annuity plan depends on the type of plan that you have chosen. Let’s understand –

1. Deferred Annuity Plans

   Under deferred annuity plans, you choose a policy tenure over which you want to accumulate the retirement corpus. You can pay premiums for regular intervals, or in one lump sum and get the policy. Insurance coverage is offered during the policy tenure. This means that on premature demise, a death benefit will be paid, subject to policy terms and conditions. However, if the plan is vested or surrendered, you have to choose from the available options for receiving the proceeds from the policy:

   Some of the commonly available options include the following⁴ –

   • To utilize the entire proceeds to purchase immediate annuity or deferred annuity from the same insurer at the then prevailing annuity rate subject to the Regulation 15(iii), the policyholder shall be given an option to purchase immediate annuity or deferred annuity from any other insurer. or
   • To commute up to 60% and utilize the balance amount to purchase immediate annuity or deferred annuity from the same insurer at the then prevailing annuity rate subject to Regulation 15(iii). However, the policyholder shall be given an option to purchase available annuity from any other insurer.
   • Every policyholder shall be given an option to purchase immediate annuity or deferred annuity from another insurer at the then prevailing annuity rate to the extent of percentage, as stipulated by the Authority, currently 50%, of the entire proceeds of the policy net of commutation.
   • In case the proceeds of the policy either on surrender or vesting are not sufficient to purchase minimum annuity as defined in Regulation 3(a) of IRDAI (Minimum Limits for Annuities and Other Benefits) Regulations, 2015, as amended from time to time, such proceeds of the policy may be paid to the policyholder or beneficiary as lump sum.

2. Immediate Annuity Plans

   Under immediate annuity plans, you usually pay a single premium to buy the policy. After buying the policy, you choose the annuity payout frequency and the annuity payments start immediately. Some plans might offer a deferment period after which the annuity payouts commence. There are different types of annuity options and you can choose an option matching your needs.

   
   

Difference Between Life Insurance and Annuity

Knowing the difference between life insurance and annuity will help you make the right decision for your goals.

So when comparing annuity vs life insurance, always keep in mind that it’s not about which is better, but which one suits your current and future financial needs better.

Advantages Of Life Insurance

1. Life insurance plans provide financial protection against the risk of premature demise. If the life insured passes away prematurely, life insurance plans pay a benefit to help the family face the financial strain suffered.
2. There are different types of life insurance plans and you can choose one which allows you to fulfil the financial goals that you have.
3. The tax benefits offered by life insurance plans help you reduce your tax liability and also create a tax-efficient corpus for your goals subject to conditions.
4. The premiums may be cost-effective. Moreover, life insurance plans offer different premium payment terms and frequencies to make the premium affordable.
5. Certain life insurance policies can also be used as collateral against which you can raise loans when you need funds. Moreover, some plans, like endowment and money-back plans, allow you to avail of a loan under the policy itself.
    

Advantages Of Annuity

1. There are two types of annuity plans. You can choose a plan depending on your retirement planning strategy. If you want to create a corpus for retirement and have an investment horizon for the same, deferred annuity plans may be selected. On the other hand, if you want to create a source of regular income with a corpus that you already have, you may choose immediate annuity plans.
2. There are different annuity payout options available. In one of which, you can choose to get annuity payouts on your and your spouse’s life to ensure financial stability for your spouse when you are not around.
3. With the return of purchase price annuity payout option, upon death of the annuitant, the purchase price will be returned to the nominee.²
4. An annuity is paid lifelong and offers guaranteed* amounts. You can also choose the payout frequency from monthly, quarterly, half-yearly and annual modes.
5. You can live a financially comfortable life with life insurance annuity plans.
    

Who Should Buy an Annuity Plan?

An annuity insurance plan is made for people who want peace of mind after they retire. Choose annuities when:

• You’re retiring soon: If your regular salary is ending and you don’t have a pension, an annuity fills that gap.
• You’ve received a lump sum: You have a lump sum amount either from a PF withdrawal or a one-time bonus. You can turn that into monthly income.
• You don’t want to rely on others financially: An annuity gives you independence in old age.
• You want s low-risk income: Fixed annuities give you a predictable payout, can be suitable if you are risk averse.
• You have long-term expenses: Like healthcare, spouse support, or home help.
   

Who Should Buy a Life Insurance Plan?

If you have individuals who depend on your income, a life insurance plan becomes important. It makes sure that your loved ones stay financially secure even after your death.

• You have dependents like your spouse, children, or ageing parents who rely on your income to run the household.
• You’ve taken loans, like a home loan or personal loan. Your life insurance can help your family pay it off if you're not around.
• If you’re the only earning member in a single-income household, life cover acts like a financial shield for your family.
• When you want to build a financial legacy, some plans offer a savings or returns component. These can help meet long-term goals like children’s education or marriage.
   

Tips to Choose the Most Suitable Plan: Annuity or Life Insurance

When comparing life and annuity insurance, the choice depends on your goals. Some people may need just one. Others may need both, one to support their family, and one to support themselves after retirement.

• Understand your goal: If you aim to protect your family even after your death, go for a life insurance plan. If your goal is to receive a steady monthly income after retirement, consider an annuity plan.
• Know your risk level: If you don't want to take any market risks, fixed annuities or life insurance plans like a pure term insurance plan might be a better option for you. However, if you are comfortable with some risk, you can explore ULIP-based life insurance plans or variable annuities.
• See your income pattern: If you want to secure your family’s finances after your death, you can opt for a plan that offers life cover. But if you’re planning for your own income after retirement, annuities can help fill that gap.
• Think long-term: No matter which financial product it is, it is never wise to rush into making a decision. Both life insurance and annuity plans are long-term commitments and therefore, make an informed choice.
   

Conclusion

Life insurance and annuity offer a variety of coverage options which you can choose basis your financial goals. The different types of life insurance plans can provide insurance protection and also help you save up. Annuity plans, on the other hand, take care of retirement planning and come in handy in your golden years. Understand the difference between life insurance and annuity plans and then choose relevant solutions for your portfolio.

FAQs

1. In what ways do life insurance and annuity cater to diverse financial needs and objectives?

   Life insurance plans come in different types to cater to your different financial goals. For instance –

   Endowment plans can help you create a corpus for your financial goals

   Money-back plans not only help in saving but also give liquidity with money-back benefits

   • Term plans provide a financial safety net for your loved ones in your absence
   • Child insurance plans help in securing your child’s financial future
   • ULIPs help you invest and earn market-linked returns on your investments
   • Annuity plans, on the other hand, help to plan for retirement. Deferred annuity plans can help you save up and create a retirement corpus while immediate annuity plans ensure guaranteed* annuity payouts lifelong thereby creating a source of income in your old age.
      

2. Are life insurance annuity payments subject to taxation?

   Yes, the annuity payouts received from annuity plans are taxed in your hands at income tax slab rates under old and new regimes.

   
   

3. Which option, annuity vs life insurance, is more appropriate for retirement planning?

   Annuity plans guarantee* lifelong annuity payments thereby taking care of your financial needs after retirement. However, if you wish to avail a lumpsum amount in your retirement years, you may opt for savings oriented life insurance plans, like ULIPs. Choose the one that suits your requirement and goals.

   
   

4. Are life insurance and annuity products guaranteed?

   Life insurance provides a death benefit to the nominee in case of death of life assured during the policy tenure, subject to terms and conditions of particular plan.

   Annuities, on the other hand, are designed to provide you with a regular income especially during retirement. While some annuities offer fixed, guaranteed* payouts, others may vary depending on how the market performs.

   
   

5. What are the types of annuity plans?

   There are different types of annuity plans you can choose from:

   • Immediate Annuity: Starts giving you income right after you invest
   • Deferred Annuity: Begins payouts after a set period, usually post-retirement
   • Fixed Annuity: Offers a steady, guaranteed * income at a future date
   • Variable Annuity: Income fluctuates based on market-linked investment.
      

6. How do annuities differ from insurance policies?

   Life insurance protects your family by paying out a sum of money if you pass away during the policy tenure. Some life insurance plans also offer survival/maturity benefit and bonus, if applicable. An annuity plan provides regular income while you’re alive, usually after retirement. The difference between life insurance and annuity lies in who gets the payout, when, and for what purpose.

   
   

7. What are the different types of annuity plans available?

   You can choose from immediate annuity, deferred annuity, fixed, variable, or indexed annuity plans. Each one works differently based on when you want the payouts and whether you prefer stable income or market-linked returns.

   
   

8. How can I buy an annuity plan in India?

   You can buy an annuity plan online through the insurer’s website or offline through an agent. Always compare options before picking one. Look at payout types, benefits etc. Many people also purchase life insurance alongside annuities for more complete financial protection.

   
   

9. Can I have both a life insurance policy and an annuity?

   Yes, you definitely can, and many people choose to have both. Both of these have different purposes where life insurance helps your family live comfortably in your absence, and an annuity insurance plan helps you after retirement. Together, they offer financial protection and secure an income when your active earnings have stopped.

   
   

10. Do annuities offer life cover like life insurance plans?

    No, annuity plans do not offer life cover. They are meant to supplement your retirement income. In contrast, life insurance plans pay your loved ones in the event of your demise, making sure that they continue to have a similar lifestyle even in your absence.

    
    

11. Is the payout from life insurance and annuity different?

    One of the main differences between life insurance and annuities is how the money is paid. Life insurance pays the sum assured to your nominee after your demise. Annuity plans give you a regular income during your retirement years.