Annuities and life insurance, both quite popular investment tools, are contracts that are similar in nature. However, the two come with different objectives. For understanding the basic difference between annuities and life insurance, we need to know their definitions and look at their features.
Life insurance is a bipartite contract between an insurance company and an insurer. Under this contract, the insurance company promises to pay a sum of money, called sum assured, to the designated nominee in the event of the death of the insured.
In India, different variants of life insurance policies are sold by life insurance companies. The different types of policies are as under:
- Endowment Plans
- Terms Insurance Plans
- Whole Life Plans
- Money Back Policies
- Saving Plans
What is Annuity?
Annuities are contracts between you and the insurance company where a premium needs to be paid to buy the policy. The insurance company, in return, makes regular disbursements on you. The periodicity of the same may be with immediate effect or deferred by choice. Annuity plans are one of the most popular post-retirement plans India has.
As is evident from the respective definitions, annuities are different from life insurance policies. They are supposed to be serving an opposite purpose. Life insurance provides a predetermined income if the insured meets with death. Whereas, annuities are supposed to be guaranteeing an income in case you live long.
As a person keen to secure the future of your near and dear ones, when you make your retirement plans, life insurance companies offer both life insurance plans and annuities. Now, let us look at the noteworthy differences between the two products:
|Protects your dependents and helps in meeting financial goals
|Income protection for you and your spouse
|Cannot defer life cover
|Can be deferred
|Gets functional after demise of the insured
|Functional only during the lifetime of you and your spouse
|Life insurance does not lead to annuity
|Annuity policy may have a life insurance component
|Maturity or partial payment from life insurance are tax free
|Payouts from annuity are taxable
|Only a whole life or a life term plan is a legacy plan
|Majority of annuity policies are legacy plans
|Premium is calculated basis mortality of an individual
|Premium calculated basis life expectancy of an individual
|Mode of payment is one time
|It is lifetime payment till the death of the plan holder
|Typically bought by an individual falling within the age bracket of 25-45 years
|Popularly bought between age bracket of 40-65 years
Both life insurance policies and annuity plans are offered and sold by life insurance companies. They have some characteristics that are common and at the same time have some basic differences. In the following section, let us ponder on the features of both the options to have a fair idea on life insurance and annuity.
When you sit and work out how much you need to sail through the phase of life when the regular flow of income stops, you need to refer to a retirement calculator. The retirement calculator takes cognizance of credentials like age, planned retirement age, current inflow of income, how much to invest, and planned expenses. It helps you arrive at the optimum coffer that you require to have a comfortable life in your sunset years.
Having a look at both the life insurance and annuity policies, one may arrive at a conclusion that both the plans need to feature in your retirement plans.
In cases of life insurance policies, you pay a premium over a period of time, where funds keep getting accumulated. On maturity of the term, or in the unfortunate event of the insured’s death, the fund gets disbursed on the designated nominee.
In a situation where an individual is alive much beyond his age of regular income, annuity plans provide a guaranteed income till the time that person is alive.
All the leading life insurance companies in India offer both different life insurance plans as well as annuity plans. Under the tutelage of IRDAI, both the investment options are safe. At the same time, both offer financial security to you in their own ways.