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Difference Between Life Insurance and Annuity Explained

Are you confused between annuity plans and life insurance plans?

Both these plans offer several advantages to policyholders. However, to select the most appropriate plan, it is essential to know the difference between annuity and life insurance policies. This will help you to make the right decision. Before proceeding, it is also essential to have a clear idea about each.

What Is a Life Insurance Policy?

This is a contract between an insurance provider and a policyholder that guarantees a sum assured to a nominee in case of the demise of the policyholder. Some of these plans only offer protection, whereas others offer both protection and investment options.

The different types of life insurance plans are as follows:

Term insurance plans
Endowment insurance plans
Unit-linked insurance plans
Whole life insurance plans
Child insurance plans
Money-back insurance plans

What Is Annuity Policy?

This is a contract between an insurance provider and policyholder where the buyer has to pay the price as premiums or together as a lump sum. However, the plan is not linked to money markets, and hence the risk associated is low. Moreover, it acts as a source of income throughout your life and offers you the flexibility to choose the frequency of payout.

The different types of annuity plans are as follows:

Fixed annuity plans
Deferred annuity plans
Immediate annuity plans
Variable annuity plans

What is the Difference Between Annuity Plan and Life Insurance Plan?

Criteria	Annuity Plans	Life Insurance Plans
Definition	Long-term investment plan offering fixed returns	Offers financial protection to a nominee in case of a policyholder's death
Objective	Acts as the legacy policy only if there is an unused amount	Acts as a legacy policy
Coverage	Covers life as well as income	Covers the life of the insured
Payouts	Throughout life	Only after the death of the insured
Types	Immediate annuity, variable annuity, fixed annuity, and deferred annuity.	Term insurance, whole life insurance, ULIP, Endowment plans, Child insurance plans, and Money back insurance plans
Tax Benefits	Not Available	Available
Death Benefits	It is available as an optional rider	It is usually the basic plan
Interest Rates	Higher than life insurance plans	Lower than annuity plans
Premiums	Calculated based on life expectancy	Calculated based on current health and lifestyle
Payment Amount	Usually fixed and determined at the time of purchase of the policy	Varies with premiums
Who Can Raise a Claim	Policy holder	Nominee

In addition to the differences between annuity vs life insurance policies, you must also be aware of the advantages that each provides.

FAQs About Annuity Vs Life Insurance

Is annuity income taxable?

Yes, you will have to pay tax on the money that you are receiving from the annuity plan. This is somewhat similar to the tax that you usually pay on your regular source of income.

What should I consider while selecting the right life insurance policy?

Below are some crucial things that you should consider to select the most appropriate plan for you:

Consider the financial goals that you have set for yourself.
Analyse your current income to select the most affordable plan.
Assess your family’s current and future lifestyle to decide the right coverage amount.
Check the availability of rides that you can add to your plan for maximum benefit.
Keep in mind the existing liabilities while selecting the right plan.

Which is the most affordable life insurance plan?

Term life insurance plan is the most affordable one. This is mainly because it offers coverage only for a fixed number of years and has no cash value.

Other Important Features of Life Insurance

Assignment in Life Insurance

6 Key Benefits & Advantages of Life Insurance Explained

Types of Riders in Life Insurance in India

GST on Life Insurance Premiums: Everything You Need to Know

What is a Beneficiary in Life Insurance: How it Works, Types & Eligibility

Terminal Illness Rider in Insurance

11 Tips on How to Choose a Life Insurance Policy

Difference between Critical Illness and Disability Insurance Explained

Nominee in Life Insurance Policy

What is the Difference between Life Insurance Beneficiary Vs Will?

9 Essential Features of Life Insurance Policy You Need to Know

9 Reasons Why Life Insurance Policy is Important & Why do you Need It?

Surrender Value of Life Insurance

Know All About Term Plan with Return of Premium (TROP)

Difference Between Nomination And Assignment in Life Insurance

Policyholder in Life Insurance

What is the Difference between Life Insurance and Annuity?

Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.