Life insurance and annuities are mirror images of each other. Life insurance: you pay premiums while alive; if you die, your beneficiaries receive a lump sum. Solves the 'dying too soon' problem. Annuities: you pay a lump sum (or premiums); if you live, you receive income payments. Solves the 'living too long' problem. Many people need both: life insurance to protect their family if they die too soon, and an annuity to protect themselves if they live too long. The two products are often used together in retirement planning.
Key Points
- Life insurance solves the 'dying too soon' problem — protects your family
- Annuities solve the 'living too long' problem — protect you from outliving your money
- Life insurance: premiums while alive, lump sum to beneficiaries at death
- Annuities: lump sum upfront, income payments while alive
- Many people need both: life insurance for family protection, annuity for retirement income
- Both are issued by insurance companies and have tax-deferred growth features