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Difference Between Annuity & Life Insurance

Difference Between Annuity & Life Insurance

Life is full of surprises. Understanding and planning before any unforeseen events give you the benefit of financial stability. Knowing your financial requirements and retirement plans can give you an upper hand in choosing the optimal insurance scheme. Both life and annuity insurance are great long-term insurance schemes. However, they differ in their meanings, benefits, terms and conditions.

Life insurance provides financial support to your loved ones after your death. It has monthly premiums, and rider advances. Annuity, on the other hand, is a retirement scheme that provides financial security to you after your retirement age. 

In other words, life insurance is helpful if you die before your policy term period, whereas the annuity is helpful if you outlive your tenure period.

What is a life insurance policy?

Life insurance is a contract between you and your insurer. The contract sets out how much coverage you have purchased and any other important details. A life insurance policy consists of many different components that fit together to create the overall insurance contract. The information you provide when you apply for a policy is one of those components. To enforce the contract, the life insurance application must correctly state the insured’s previous and present health issues and high-risk behavior’s.

How does a life insurance policy work?

When working out annuity vs term life insurance, it is important to understand the working of each. The life insurance policy provides financial support to the insured individual’s family after the individual dies. The insurance policies are secured contracts. They provide financial benefits to help the family bear the financial loss that the death of the insured would cause.

  • The insured individual must pay a premium in instances of 12 or as yearly premiums, depending on his/ her preference
  • If the insured individual dies during the term of the policy, then the assured sum goes to the appointed beneficiaries
  • Some types of insurance plans also provide maturity benefits. The insurance company pays the assured funds if the individual outlives the policy tenure
  • The beneficiaries must make a claim to receive the assured sum
  • The funds can be claimed by providing the death certificate of the insured individual. Once verified, the beneficiaries receive the funds.

Types of life insurance policies

Life insurance is important and offers a broad scope of coverage. A life insurance policy’s principal goal is to safeguard your family’s financial security when you pass away. Thus, before deciding to take the life insurance, check on the types of life insurance and what each life insurance has to offer.

The different types of life insurance plans are:

  1. Term Life Insurance
    Term life insurance provides basic coverage that allows you to select the length of time you need it. This is a great way to protect your family in the event of your untimely death. Term policies are great for financially independent adults who don’t want or need coverage beyond the amount selected. Term plans are pure life insurance plans with no maturity benefit.
  2. Endowment Plans
    There is a death as well as maturity benefit in endowment plans. It provides coverage for your untimely death along with an element of savings. These plans can be pure endowment plans, money-back plans, child plans, etc. However, these plans are traditional insurance plans with guaranteed benefits along with bonuses, if applicable.
  3. Unit Linked Insurance Plans
    In ULIP, the policyholder can choose to participate in the market through investments. Here there are no guaranteed benefits as both the death as well as maturity benefit would depend on the market performance, subject to a minimum of the pre-defined sum assured.

Benefits of life insurance policies

Let us take a look at the benefits of a life insurance policy that you can expect to receive:

  1. Protection against Mishaps

    Having a life insurance policy gives your and your family a secure future. It also safeguards the interest of people whose incomes are slightly decreasing with increasing age.

  2. Tax Benefits

    This area of life insurance policy provides the policyholder with tax benefits. The Income Tax Act under Section 80C provides that the death benefit, or amount received as proceeds under life insurance, is exempt from tax. The premium paid toward the life insurance policy can also be claimed up to INR 1.5 lakhs.
    Also, the maturity benefit, wherever payable, is tax-free under section 10(10)D subject to the terms and conditions.

  3. Loan Options

    Most life insurance companies, especially endowment plans, give you the benefit of taking a loan against the policy if you are in need of money upto 80-90% of the surrender value of the plan.

  4. Assured Income

    This section provides your family with an assured income. You can choose a lump sum payout at the time of your death, at a regular time interval or a combination of both. With this money, they can pay electricity bills, house rent, children’s school fees and many other things. This means even after your death your family will be fully financially secure.

What is the meaning of Annuity?

An annuity synonymously with ‘pension’ is a series of regular, predictable cash flows guaranteed for the rest of your life. This is done by making a lump sum/ systematic investment. The payment you receive is generated from the investment that is done by the financial company. This is a good choice of income after retirement that gives you the freedom to plan your retirement. You can choose the frequency of your pension, it can be monthly, quarterly, half-yearly or yearly. 

How does an annuity work?

An annuity plan is a long-term investment scheme. Here the insured individual must pay a lump sum or a series of payments and receive funds regularly from the insurance company.

  • An annuity is an income provided to the annuitant after the vesting age.
  • So, once you invest in an annuity plan, you need to choose the age from when you wish to receive the annuity. Usually, that is closer to 55 to 60 years of age. This is called the “Vesting Age”
  • The time from when you invest till the vesting age, is called the Accumulation Phase, wherein you are expected to create your annuity corpus from where you would be provided with an annuity according to your choice.
  • At the time of vesting, you have the option of choosing the “type” of an annuity from the available options such as:
    • Life Annuity, i.e. annuity would be paid to the annuitant as long as he lives but nothing would be paid to the nominee after his death
    • Joint Life Annuity, i.e. annuity would be paid to the annuitant as long as he lives and after his death, the annuity would continue to be paid to the spouse as long as she survives. However, once both die, the policy would be terminated and nothing would be paid to the nominee
    • Life Annuity with Return of Purchase Price, i.e. annuity would be paid to the annuitant as long as he lives and after his death, the nominee would receive the entire purchase price as death benefit and the policy would be terminated.
    • Joint Life Annuity with Return of Purchase Price, i.e. annuity would be paid to the annuitant as long as he lives and after his death, the spouse would continue to receive the annuity. When both die, the nominee would receive the entire purchase price as a death benefit and the policy would be terminated.
    • Annuity Certain of 5/10/15/20 years, i.e. the annuity would be paid for a minimum of 5/10/15/20 years and then as long as the annuitant survives.

Types of Annuities 

Annuity is classified into two main types: immediate annuity and deferred annuity

  1. Immediate Annuity

    Immediate annuity gives you the benefit of immediately receiving the payments after your very first investment. Unlike other types of annuities, the payment can be received immediately, often with interest, which makes this instrument attractive to people who want to plan their future pension income.

  2. Deferred Annuity

    A deferred annuity agreement is a form of an annuity in which the annuity/ income is not available to the investor until a date in the future, at the vesting date. At the time of vesting, the annuitant can withdraw a maximum of 1/3rd of the total corpus tax free under section 10(10)A and need to opt for an annuity from the remaining 2/3rd of the corpus.

Benefits of Annuities

Buying an annuity has many benefits, the biggest being the peace of mind for retirement or as a way to supplement retirement. Some of the major benefits of annuity include

  • Tax-efficient: The premium paid towards deferred annuity plans is tax-free under section 80CCC of the Income Tax Act 1961 upto INR 1.5 lakhs a year.At the time of vesting, the annuitant receives an option of withdrawing 1/3rd of the entire corpus tax-free u/e 10(10)A which can take care of the immediate retirement expenses. The remaining amount has to be converted into an annuity, which is taxable in the hands of the annuitant.
  • Flexibility: The timing of starting your annuity is flexible, allowing individuals to defer the purchase of an annuity until later in life when their retirement income goals may have a smaller impact on lifestyle adjustments.
  • Growth in income: Annuities can provide the substantial income that individuals are seeking to supplement or replace their income.
  • Intergenerational equity: An annuity allows the annuitant to be provided with dependable income for its expected lifespan. You have the confidence that even after you stop working, you will be able to live your second innings with pride without having to depend on anyone else financially

Annuity vs Life Insurance – Differences between life insurance and annuity plan

Both annuity and life insurance are great financial plans. Despite the saving options and similar ideologies, they differ in many aspects. Understanding these differences will help you make the best choice to invest your funds.

Annuity plan

Parameters

Life insurance plan

Annuity provides income support for the spouse and oneself.

Benefits

Life insurance benefits the loved ones/ family members.

An annuity can be deferred after a few years of investments

Defferability 

Life insurance cannot be deferred.

It works after you or your spouse outlive the tenure period

When does it work?

It works after the death of the insured individuals.

It holds benefits of life cover also

Possibility to convert in future

Does not provide annuity cover

Annuity payouts are taxable

Tax benefits

Payouts are not taxable u/s 10(10)D

Premiums are based on the insured individual’s life expectancy

Premiums

Premiums are based on the mortality of the insured individual

Ensure income for the insured individual and their spouse during their lifetime

Income security 

Ensure income to the family member or loved ones after the insured individual dies.

Know More: What are Annuity Plans?

What to choose between life insurance and annuity?

When comparing life insurance vs annuity, the key factor is to determine the purpose of buying the financial product. Before choosing any such plan, assessing your financial well-being and requirements is ideal. Knowing your future needs and priority, you can opt for life insurance or an annuity plan. 

Life insurance provides financial support to the family after your death. It can take care of your loved ones’ everyday expenses and other financial needs. Annuity plans provide a regular income to you and/ or your spouse once you retire/ stop working. It is a retirement plan to benefit yourself in your elderly age when you are no longer employed.

Life insurance benefits your family if you die prematurely, whereas annuity benefits you to live comfortably in your retired life. 

Conclusion

Financial stability is vital in all phases of life. Depending on your priority and financial requirement, you can opt for life insurance or annuity plans. Both plans provide great benefits to the insured individual one way or another. 

Tackling unexpected events can be difficult, especially if it’s a matter of life and death. Make sure you plan on how you save your funds so that when such unforeseen events occur, you have the basic support to control the extent of damage that might occur. 

If you want to provide financial stability for your family in your absence, then life insurance is a great choice. However, an annuity will be the ideal option if you want to secure your retirement plan.

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FAQs

  1. What if the insured individual dies in an annuity plan?

    Depending on the kind of policy opted, the assured sum is provided to the beneficiaries on the insured individual’s death. Similarly, the annuity may/may not continue for the spouse. For the same reason, it’s important to mention the details of the beneficiaries in the annuity plan to ensure it reaches the right hands instead of landing in any financial institution.

  2. Can annuity plans be considered life insurance?

    Even though an annuity can cover death after the individual dies, it cannot be considered life insurance. It’s rather the exact opposite of life insurance. In life insurance, you ensure to get benefits after your death, whereas in an annuity, you provide financial benefits when you outlive your life expectancy.

  3. What are the benefits of buying life insurance instead of an annuity plan?

    Life insurance provides death benefits and tax exemptions, whereas annuity plans do not provide such benefits. However, one would not be able to suffice and thus it is suggested that you weigh the pros and cons of each before making an investment.

Also Read:

Top Life Insurance Companies in India (Updated List 2024)

DISCLAIMER

This article is issued in the general public interest and is for educational purposes only. The blogs should not be used as a substitute for competent expert advice from a licensed professional to best suit your needs. Insurance is a subject matter of solicitation. For more details on policy terms, conditions, exclusions, limitations, please refer/read policy brochure before concluding sale.

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