Difference between Annuity and Life Insurance

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Retirement planning is an important part of the process of planning your future finances. If done on time, it is easier for you to meet your life objectives as you near retirement. Moreover, any unexpected financial hiccups can be managed by tweaking your investment amount to accumulate your retirement corpus. But there are two popular options of retirement plans in India that you can consider in your long-term financial plan — annuities and life insurance plans.

Both options offer death benefits, but, a life insurance plan comes in handy to provide financial protection for your dependents in your absence, whereas annuities help to provide financial support till you live. To decide which plan should you opt for, here’s a comprehensive guide that highlights the differences between the two along with their benefits:

What is life insurance?

Life insurance plans are an agreement between the insurance company and the policyholder where the insurer agrees to compensate the policyholder in exchange for a premium, on the demise or after the specified duration. In the unfortunate event of the death of the policyholder, the insurance company pays the sum assured to their nominees. Thus, it acts as a financial cushion for the dependents even in the absence of the policyholder. A life insurance plan comes in handy, especially in times when the policyholder is the sole breadwinner supporting the family financially through tough times.

Life insurance plans are available in different types among which the following are major ones:

  • Term insurance plans

Policies that offer only death benefits i.e., compensation only in the event of death of the insured individual are called term plans. These plans pay the sum assured to the nominees of the policyholder.

  • Life insurance plans with returns

Endowment plans, money-back plans, and unit-linked insurance plans (ULIPs) are some types of policies that are included under this broad category of policies. These policies have an investment component. along with the protection feature of a term insurance policy.

  • Whole life plans

Whole life insurance plans provide protection for your entire life up to 100 years of age. The death benefit is paid under a whole-life policy to the beneficiaries. In some cases, these plans even allow you to pay premiums for only a limited period while they offer protection for your entire life.

What is an annuity?

An annuity is an agreement that promises guaranteed returns of a specified amount each month for the balance duration of your life. This is more like a pension plan that offers consistent returns that come in handy when people retire. Annuity plans come in handy in old age, as they create a consistent stream of income from the money deposited during the individual’s earning years.

Annuities are of two main types — immediate annuity and deferred annuity.

  • Immediate annuity

Under an immediate annuity, the payments start flowing in as soon as the first investment is made. Thus, when you pay a specified amount to your insurance company, they make regular payments for a given time frame as long as you are alive. This is a nifty alternative in case you are nearing retirement.

  • Deferred annuity

A deferred annuity is a contract that generates income for the retirement years. When recurring payments or a one-time deposit is made, and held for at least one year, the insurance company offers repayment of your investment along with some returns. Thus, the deferred annuity is what accrues money whereas the immediate annuity is what pays money.

What is the difference between an annuity and life insurance?

Considering its shared features or similarities, some may assume they can use both terms alternatively; however, there is a significant difference between the two. Let’s look at the differences –

Annuity PlansLife Insurance Plans
Annuity plans can be used to provide income protection for spouse and self.Life insurance plans are primarily designed to provide protection to your financial dependents in your absence.
Annuity plans have the option to be deferred after their investment.Life insurance plans, on the other hand, cannot be deferred like an annuity plan.
Annuity plans only work till either you or your partner is alive.The protection features of life insurance plans only kick into the picture in your absence.
Some annuity plans also provide a small life cover.Life insurance plans do not include an annuity feature.
The payouts from annuity plans are taxable in the hands of the receiver.The compensation paid by life insurance companies is exempt from tax implications.
The death benefit in annuity plans is an optional feature.The fundamental objective of a life insurance policy is providing a death benefit to the dependents

These are some of the differences between an annuity plan and a life insurance policy. Depending on your purpose, you can choose to obtain a financial safeguard in your absence using a life insurance policy or to supplement your retirement funds by way of an annuity pay-out. To decide which plan works the best, you can make use of a retirement calculator. A retirement calculator aids in helping you decide how different investment options can help accumulate a substantial corpus to serve you during your golden years.

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