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When you’re planning for your financial future, you may consider getting an annuity or applying for a life insurance policy. Both products are provided by insurance companies and have a role to play in financial planning. Life insurance is designed to benefit your family after your passing, while an annuity provides an income from the time you retire until you pass away. Here’s what you should know about life insurance vs. an annuity so you can decide whether they’re right for you:
Life insurance is a policy that can financially help protect your partner, children, or other loved ones. As a policyholder, you’ll pay a monthly or annual sum to the insurer called a premium. Then, after you pass away, the insurer pays out a death benefit of a predetermined amount to your beneficiaries.1 Your loved ones can use the life insurance payout to help missed income, help cover funeral costs, and pay off outstanding debts. There are many different life insurance policy types that may be at your disposal, including:
Term life insurance helps cover you for a limited period of time, such as 10 or 20 years. If you pass away within the policy’s term, your named beneficiaries receive the death benefit.2 Term insurance typically has more competitive premiums compared to permanent life insurance plans.
Whole life insurance is a type of permanent policy, which means it lasts for your entire lifetime and has a guaranteed death benefit. Whole life insurance may have higher premiums, but it also has a cash value component you can borrow or withdraw from as needed.3
Variable life insurance offers permanent coverage that combines a guaranteed death benefit with a cash value component that is invested in mutual funds. This investment element means that the cash value of the policy may grow or decrease based on the market.4
Also known as burial insurance, final expense insurance can help cover end-of-life expenses like a funeral service, medical bills, and burial expenses that may be left to your family after your passing.5 This payout may not be comparable to what other permanent life policies offer.
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
An annuity is an agreement between you and an insurer that requires them to provide you with a monthly or annual income in exchange for periodic installments or a lump sum payment you make. An annuity offers a way for retired individuals to supplement their pension or other income.
Depending on the type of annuity you choose, you may receive payments for a fixed number of years or until you die. Annuities grow on a tax-deferred basis and are backed by the insurance company's ability to pay claims. Your annuity payments include not only your original lump sum or premium, but also accumulated interest.
Annuities help ensure that you have the funds you need to maintain your lifestyle even after retirement. Here are some common types of annuities:
A fixed annuity may be the safest option and is a great choice for anyone seeking predictability.6 Fixed annuities provide guaranteed returns on your premiums. The interest rate may reset after a few years, but for the most part, your payments are stable.
An income annuity provides a fixed monthly income that may last for your entire life or a specific period. You can request payments immediately or at a later stage.
Variable annuities tend to be riskier than fixed annuities, but they can also offer greater potential for growth. Your premiums are invested into stocks, bonds, and money market accounts. If these investments perform well, the return can be great, but keep in mind that poor investment performance may result in lower payouts.7
Here are the main differences between life insurance and an annuity:
Annuities are paid out during the annuitant’s lifetime, while life insurance is paid out to beneficiaries once the policyholder has passed away.
Life insurance beneficiaries can be your children, partner, dependents, or a charitable organization of your choice. On the other hand, you are the primary beneficiary of your annuity. But it’s important to note that some annuities have a death benefit provision, which means a beneficiary named by the annuitant would receive the remaining payouts after the annuitant passes away.8
Since annuities are intended to last years and act as supplemental income, many people usually receive them as monthly payments. On the other hand, beneficiaries can decide how they want to receive a life insurance payout. Lump sum payments are common, but your loved ones can also choose to be paid in annual installments to prevent the death benefit from running out too quickly.
As life insurance and annuities serve different purposes, people may choose them at different stages in life. Life insurance premiums are typically more competitive when policyholders are young and healthy. Life insurance may also make sense when you have dependents relying on your income, such as a partner or children. Annuities, however, are often purchased by older individuals, especially those approaching retirement age. It’s less common to purchase an annuity early in life.
Life insurance death benefits are generally not taxable. Annuities and life insurance both grow on a tax-deferred basis, but with annuities, you’ll pay taxes on your payouts. The amount of taxes you’ll owe can depend on several factors, such as the annuity’s payout structure.8
Here are a few reasons to consider getting life insurance:
Annuities also have excellent benefits, including:
Life insurance enables you to provide help for loved ones, while an annuity helps you remain financially stable even after you retire. It can be smart to have life insurance and an annuity since each product offers a distinct form of added financial protection. Be sure to consider your financial goals, budget, and needs when deciding whether both financial products are right for you.
There are several differences between life insurance and annuities, and both products can help provide financial security. If you're looking for life insurance, Aflac offers several policies that can help give you and your loved ones added peace of mind. Our term life insurance policies can give you temporary coverage with competitive premiums, and our whole life plans will help cover you for life. Learn more about life insurance options from Aflac and get a quote today.
1 Investopedia - Life Insurance: What It Is, How It Works, and How to Buy a Policy. Updated May 27, 2024. Accessed June 4, 2024. https://www.investopedia.com/terms/l/lifeinsurance.asp.
2 Investopedia - Term Life Insurance: What It Is, Different Types, Pros and Cons. Updated January 11, 2024. Accessed June 4, 2024. https://www.investopedia.com/terms/t/termlife.asp.
3 Investopedia - Whole Life Insurance Definition: How It Works, with Examples. Updated September 21, 2023. Accessed June 4, 2024. https://www.investopedia.com/terms/w/wholelife.asp.
4 Investopedia – Variable Life Insurance. Updated December 13, 2022. Accessed June 4, 2024. https://www.investopedia.com/ask/answers/08/variable-life-insurance.asp.
5 CNN Underscored - Final expense life insurance: Is it right for you? Updated March 6, 2024. Accessed June 4, 2024. https://www.cnn.com/cnn-underscored/money/final-expense-life-insurance.
6 Investopedia - Annuity vs. Life Insurance: What's the Difference? Updated September 02, 2023. Accessed June 4, 2024. https://www.investopedia.com/articles/personal-finance/093015/life-insurance-vs-annuity.asp.
7 Investopedia – Guide to Annuities: What They Are, Types and How They Work. Updated March 17, 2024. Accessed June 4, 2024. https://www.investopedia.com/terms/a/annuity.asp.
8 Annuity.org - Annuity Beneficiaries: Death Benefits & Payout Options. Updated May 28, 2024. Accessed June 4, 2024. https://www.annuity.org/annuities/beneficiaries/.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
In AR, DE, ID, OK and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Aflac Final Expense policies are not available in New York.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
Aflac WWHQ | Tier One Insurance | 1932 Wynnton Road | Columbus, GA 31999
Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211
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