What Do Both Life Insurance and Annuities Have in Common?

Life insurance and annuities have more in common than many people realize.

The biggest similarity is simple:

Life insurance companies issue both products.

Both are policies.

Both policies are contracts.

And both should primarily be evaluated based on the contractual guarantees they provide rather than hypothetical future market returns.

Key Takeaways

• Life insurance companies issue both life insurance and annuities.
• Both products are contractual insurance policies.
• Life insurance primarily provides a death benefit.
• Annuities primarily provide living benefits such as principal protection and lifetime income.
• Both products should be compared across carriers for the contractual guarantee you need.
• Neither should be purchased primarily for hypothetical market growth.

Both Are Insurance Contracts

When you purchase life insurance, you receive a policy.

When you purchase an annuity, you also receive a policy.

Those policies are legal contracts that define what the insurance company is obligated to provide.

That contractual structure is the biggest thing the two products have in common.

Life Insurance Focuses on the Death Benefit

Life insurance is primarily designed to provide money when the insured person dies.

For many people, the basic objective is straightforward:

Obtain the amount of death benefit needed at an appropriate cost.

The benefit can provide financial protection for spouses, children, and other beneficiaries.

Annuities Focus on Living Benefits

Annuities generally solve financial needs while you are alive.

The primary annuity objectives can be summarized by the PILL framework:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

That makes the role of an annuity different from the primary role of life insurance.

Both Are Issued by Life Insurance Companies

The same type of company can issue:

• term life insurance
• permanent life insurance
• MYGAs
• Immediate Annuities
• Deferred Income Annuities
• QLACs
• Fixed Index Annuities
• other annuity products

The company uses insurance principles to price and guarantee the benefits.

Death Benefits Are Taxed Differently

Life insurance and annuities do not receive identical tax treatment.

Life insurance death benefits are generally treated differently from annuity death benefits.

Annuity beneficiaries may owe taxes on taxable gains or qualified retirement money.

That difference matters when comparing legacy strategies.

Both Should Be Bought for Guarantees

Life insurance should be purchased for the contractual death benefit.

Annuities should be purchased for the contractual guarantee they provide.

That might be:

• a guaranteed interest rate
• guaranteed lifetime income
• principal protection
• another contractual benefit

Neither decision should depend primarily on an attractive hypothetical illustration.

Do Not Buy Either Primarily for Market Growth

The stock market has products designed specifically for market growth.

Life insurance and annuities are insurance products.

If the sales presentation for either product depends heavily on non-guaranteed market-like returns, understand exactly what is contractual and what is hypothetical.

Both Are Commodity Products

There is not one universally best life insurance company.

There is not one universally best annuity company.

The appropriate carrier depends on the guarantee you need and the pricing available for your specific situation.

That means shopping multiple companies can be useful for both products.

Comparing Life Insurance Companies

With life insurance, you can compare:

• death benefit
• premium
• policy duration
• financial strength
• contractual provisions

The company offering the appropriate death benefit at the best contractual value deserves consideration.

Comparing Annuity Companies

With annuities, the comparison depends on the objective.

For lifetime income, compare contractual payments.

For MYGAs, compare:

• guaranteed rates
• terms
• ratings
• liquidity

Again, the logo does not determine the winner.

Annuities and Life Insurance Can Work Together

The two products can also complement one another.

For example, an Immediate Annuity can potentially provide an income stream used to pay life insurance premiums.

That creates guaranteed income on one side and a contractual death benefit on the other.

Joint Lifetime Income and Life Insurance

The annuity could also potentially be structured jointly.

If one spouse dies, the surviving spouse can continue receiving the contractual annuity income.

The life insurance death benefit may provide an additional lump sum.

That can create two different forms of financial protection.

Keep the Product Roles Clear

Life insurance primarily provides a death benefit.

Annuities primarily solve living needs such as lifetime income and principal protection.

When each product is used for the job it is designed to perform, the overall strategy becomes easier to understand.

Where to Compare Annuities

Use our annuity calculators to compare current contractual guarantees from multiple insurance companies.

For life insurance, separately compare the contractual death benefit, premium, and policy structure appropriate for your needs.

The Bottom Line

Life insurance and annuities are both insurance contracts issued by life insurance companies.

That is their most important similarity.

But their primary purposes are different.

Life insurance is generally designed to provide a contractual death benefit. Annuities are generally designed to provide living guarantees such as principal protection and lifetime income.

Both should be evaluated by what the policy actually guarantees rather than what a sales illustration says might happen.

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