Difference Between Life Insurance and Annuity

Overview Of Life Insurance

 

A life insurance policy is a contract between an insurance company and a policyholder. Under the contract, the insurance company bears the financial risk of the policyholder and promises to compensate him if the risk occurs. The policyholder, on the other hand, pays a premium to get covered for the risk.

In simpler terms, life insurance plans usually cover the risk of premature death. If the life insured passes away during the selected policy tenure, the specified death benefit is paid. This benefit may help the family meet the financial loss suffered due to the individual’s death.

Many life insurance plans also offer the benefit if the life insured survives the policy tenure. This benefit may help the individual meet their financial goals.

There are different types of life insurance plans and each one is different from one another. For instance, there’s a primary difference between life insurance and annuity as both the plans work differently. Let’s understand the difference.

 

How Does Life Insurance Work?

 

There are different types of life insurance policies. You can choose a specific policy depending on your financial goals. After choosing the policy, you usually have to choose the –

1. Sum assured

2. Policy tenure

3. Premium paying tenure

4. Premium paying frequency

5. Optional riders

Depending on these choices, the premium is calculated. You pay the premium for the chosen premium paying term and enjoy the coverage offered by the policy.

If, during the policy tenure, the life insured passes away, a death benefit is paid and the plan is terminated. However, on the other hand in some insurance plans, if the insured person happens to survive the policy tenure, a maturity benefit may be paid and the coverage will be terminated.

To clearly understand the difference between life insurance and annuity, read further about both types of plans.

 

Overview On Annuity

 

Annuity plans are retirement-oriented plans which help you plan a corpus which will generate a source of regular pension after retirement. There are two main types of annuity plans – deferred annuity plans and immediate annuity plans.

Deferred annuity plans have an accumulation period over which you can pay the premium and accumulate the retirement corpus. Once the period ends, you will start receiving guaranteed* annuity payouts for your lifetime either immediately or after a deferment period. Immediate annuity plans are those which start annuity payments immediately after you buy the policy. They offer different types of annuity payout options and you can choose one that best matches your needs.

 

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

 

There are major differences between life insurance and annuity plans. Some of the common ones include the following –

Annuity vs life insurance

Now that we have spoken about the difference between life insurance and annuity, let us discuss the advantages of both types of plans.

 

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.

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.

 

Which One Should You Choose?

 

Both life insurance and annuity plans have their benefits and drawbacks. The choice depends on your financial needs and requirements.

A life insurance policy is suitable if –

1. You want to create a financial net for your loved ones in the case of your premature demise.

2. You want to create a corpus for your financial goals like children’s education, marriage, buying a home, etc.

3. You want to avail tax benefit on life insurance policies

On the other hand, an annuity policy is suitable if –

1. You want to save up for a financially secure retirement.

2. You want to ensure guaranteed* regular incomes after you retire which continues lifelong

3. You have a retirement corpus and you want to invest it in an avenue which guarantees* lifelong pensions

If you are young and have time to retire, you can buy a suitable life insurance policy for financial protection and to create funds for your financial goals. You can also add a deferred annuity policy and start saving for retirement.

On the other hand, if you are nearing retirement and most of your financial goals are already taken care of, annuity plans would be a good match for securing your finances after you retire.

So, assess your life stage and financial needs and then 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 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.

Reference

1. https://www.bajajallianzlife.com/content/dam/balic-web/pdf/retirement-plans/retire-rich-brochure.pdf

2. https://www.npscra.nsdl.co.in/faq-annuity-related.php (faq no.4)

General Source references –

1. https://www.iii.org/article/the-difference-between-annuities-and-life-insurance

2. https://www.experian.com/blogs/ask-experian/annuities-vs-life-insurance/

3. https://www.fool.com/the-ascent/insurance/life/life-insurance-annuity/

4. https://irdai.gov.in/document-detail?documentId=604891 (page 20)

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