Life Insurance or an Annuity — Which Suits Your Needs?

April 15, 2002

Traditional life insurance guards against "dying too soon" while an annuity, in essence, can be used as insurance against "living too long." Life insurance is generally for your family, while an annuity is generally for your own retirement.

With an annuity, you will receive a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death. As a person with life insurance approaches retirement age, and sees the children go out on their own, he or she may choose to convert all or some of the life insurance to an annuity, which can be done tax-free.

If you "die too soon" (that is, you don't outlive your life expectancy), you may get back less from the annuity than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resulting earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.