Life insurance vs annuities
Opposite risks. Dying too soon, or living too long.
These get compared because both are sold by insurers and both involve long time horizons. Structurally they're mirror images.
Life insurance protects against dying too soon. An annuity protects against outliving your money. Deciding which risk concerns you settles most of it.
The mirror
- Life insurance — you pay premiums, your beneficiaries receive a benefit when you die
- Annuity — you pay a premium or premiums, and receive income, often for as long as you live
Which risk is yours
If people depend on your income and you'd leave them short, that's the life insurance question.
If you have assets and worry about running out during a long retirement, that's the annuity question. Many people face both at different stages of life, which is why owning both over a lifetime is unremarkable.
Annuity types, briefly
- Immediate — you pay a lump sum and income begins shortly after
- Deferred — income begins at a future date
- Fixed — a stated rate of return
- Indexed — credits linked to an index, subject to caps and floors
- Variable — invested in subaccounts, with market risk, and a registered security
What to check before buying an annuity
- Surrender charges, and for how many years they apply
- All fees, including rider charges, which stack
- What is guaranteed versus illustrated
- What happens to the money when you die — some options leave nothing
- The insurer's financial strength, since you're relying on decades of payments
- State guaranty association limits for annuities, which differ from life limits
The standard that applies
Many states have adopted a best interest standard for annuity recommendations under the NAIC suitability model. Ask what standard governs the recommendation you're being given, and how the person is compensated.
Annuities are complex, long-dated and often carry meaningful commissions. That's not disqualifying — it is a reason to ask the question directly.
Where they meet
Some life policies offer annuity settlement options, paying a death benefit as income rather than a lump sum. And a 1035 exchange can move a life policy into an annuity without recognising gain, if done correctly.
Both involve tax consequences. Take advice before either.
Common questions
They insure opposite risks. Life insurance protects against dying too soon; an annuity protects against outliving your money. Which one you need depends on which risk you actually face.
Surrender charges and their duration, all stacked fees, what's guaranteed versus illustrated, what happens to the money when you die, the insurer's financial strength, and state guaranty limits for annuities.
Many states have adopted a best interest standard under the NAIC suitability model. Ask what standard applies to your recommendation and how the person is compensated.
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This page is general information, not advice about your specific circumstances. A licensed insurance professional can tell you what’s actually available to you.
General information only, not insurance advice. Coverage, availability, and terms vary by insurer and by state, and are subject to underwriting. Quote My Policy LLC is a licensed insurance producer. Nothing here binds coverage.