New messages from Aflac | View Notifications opens a dialog Close X dismisses the notification alert

Life Insurance vs. Annuity: What’s the Difference?

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:

What is life insurance?

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

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

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

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

Final expense insurance

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.

Peace of mind doesn't
have to break the bank

Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.

Get a Quote

What is an annuity?

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:

Fixed annuity

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.

Income annuity

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 annuity

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

Life insurance vs. annuity

Here are the main differences between life insurance and an annuity:

Death vs. life payouts

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

Form of payment

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.

Time frame

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.

Whether benefits are taxable

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

Why get a life insurance policy vs. annuity?

Here are a few reasons to consider getting life insurance:

  • Help with missed income: Life insurance offers added financial security to your dependents and can help them after your passing.
  • Legacy: Since the death benefit payout is usually not taxable, having life insurance can be a great way for you to leave a legacy for your children after you pass.
  • End-of-life costs: Funerals can be a major expense for the surviving partner or family. The life insurance death benefit payout can help them cover this cost and other end-of-life expenses more easily.
  • Debt management: The payout from life insurance can help your loved ones pay off any debts you may leave behind, such as a mortgage or business loan.
  • Cash value: Permanent life insurance offers a flexible cash value component you can borrow from as needed. You may choose to leverage your cash value to pay medical bills, repair or renovate your home, or even help pay for your child’s college education.

Annuities also have excellent benefits, including:

  • Maintain your lifestyle: Annuities may enable you to maintain your lifestyle even when you retire from your job. An annuity may be a supplemental income to your pension or 401(k) savings.
  • Reduce financial stress: An annuity can be a steady source of income for the annuitant until they die. This can help reduce financial stress and the risk of outliving your savings.
  • Reduced investment risk: People who choose low-risk options like a fixed annuity are essentially shifting the investment risks to the insurance company. This makes fixed annuities a safe option even for risk-averse individuals.
  • Tax-deferred growth: You don't pay taxes on your annuity until you start receiving payouts.7

Should I have life insurance and an annuity?

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.

Get a life insurance policy from Aflac

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.

Still have questions?

Explore your life insurance options.

Get a Quote