The clearer your financial goals are, the more efficiently you can plan your finances. Your long-term financial goals affect your future, especially your life after retirement. Life insurance and annuity are financial instruments that you should consider during long-term financial planning. Before deciding on which investment to put your money in, it is important to understand both the components and know the differences between both.
Understanding life insurance
Life insurance is an agreed-upon contract between a policyholder and an insurer. The policyholder pays a premium, and in exchange, the insurance company provides a life cover. A life insurance premium calculator gives the policyholder an estimate of the premium on the sum cover they need. In case of the death of the policyholder, the nominee of the life insurance will get the death benefit. The nominees are usually policyholders’ family members or loved ones. People buy a policy to ensure that, in their absence, their families do not bear any financial stress.
There are several types of life insurance policies. They are mainly divided into temporary insurance and permanent life insurance. One example of temporary insurance is a term plan where you get a life cover but for a fixed period. Whereas, when you buy whole life insurance, you get life cover for your entire life span. Also, other than traditional life insurances, there is life insurance available with an investment or saving component attached to it.
An annuity is an instrument that makes you eligible to receive a specific amount each month for the rest of your life after its purchase. The purpose of an annuity is to create a plan that will financially protect people as they age by providing a fixed amount of monthly income until the end of their lives. People pay a lump sum capital when they buy an annuity, and in exchange, they receive a payout every month for the rest of their lives.
There are two main types of annuities: immediate annuity and deferred annuity. An immediate annuity, as the name suggests, is insurance where you receive payment immediately as soon as you purchase the annuity. For people who are nearing their retirement age, this is the perfect annuity plan to go for. The other type, the deferred annuity, is a contract that offers income returns for an individual’s retirement years. An individual has to pay a one-time or recurring deposit for at least a year during deferred annuity. The annuity insurer offers repayments of your investment, along with some returns.
Life insurance vs. annuity
There are similarities between life insurance and annuity as a financial instrument. However, when you are planning out your finances, you need to know their differences so that you can choose a plan accordingly. Here are some significant differences between life insurance and annuity-
The purpose of life insurance is to protect your loved ones and to meet your financial aims for the future. On the other hand, the purpose of an annuity is to have a regular source of income, mainly for oneself.
The key feature of any life insurance policy is to protect your loved ones after your demise, whereas, an annuity is active only until you and your spouse are alive.
Source of income
Life insurance provides income to the beneficiary, who receives the sum assured in a lump sum or regular pay-outs after the demise of a policyholder, whereas the income received from an annuity is in a recurring frequency for the rest of your life.
A whole life insurance plan is the only type of life insurance policy that acts as a legacy plan. Most annuity plans work as a legacy policy if there are any amounts unused.
Life insurance is a product that cannot be deferred, while you can postpone an annuity plan for some years after investing in it.
The key purpose of life insurance is to provide a death benefit to the nominee after the demise of the policyholder. When a person buys life insurance, they use a life insurance premium calculator to get an estimate on the premiums of their required death benefit. With an annuity, a death benefit is optional.
The partial or full payout/s of a life insurance policy is/are exempt from taxes. With an annuity, all the payouts you receive are subjected to taxes.