Having a clear understanding of the financial objectives prior to your retirement will make it easier to fulfil them. The two most renowned & appropriate plans, namely Annuity & life insurance, can be very well considered to make long-term financial planning. Though both plans work differently but the common thing is that they both help the policyholder achieve their financial objectives.
To know the most appropriate plan between the two, we should discuss the differences between an annuity plan & a life insurance plan in detail. This will help make the process simpler, make an informed decision, & get a plan that best suits your financial needs.
What is an Annuity?
An annuity is a financial agreement entered into between a policyholder & an insurance company. The Annuity Definition in life insurance refers to an amount invested in regular payments or in a lump sum. In return, the insurance provider provides a regular flow of income to the annuitant. This payment will either start immediately (immediate annuity) or after a certain period (deferred annuity). Thus, it is a contract in which funds are invested either in instalments or in full to get a regular payout amount, either for a fixed number of years or for a lifetime.
What is Life Insurance?
Life Insurance is an agreement between an insurance company, i.e., the insurer & an individual, i.e., the insured. A life insurance plan that offers financial security to policyholders’ family members in the event of their death. The policyholder has to make payments towards the premium amount regularly at fixed intervals of time. The insurance company will pay the amount insured on the insured event to the beneficiaries, such as death or a benefit defined at the maturity of the plan.
Hence, the main objective is to offer financial protection to the policyholder & their family. Also, there are some general or non-life insurance policies, where some financial losses are covered, such as travel insurance, health insurance, motor insurance, commercial insurance, marine insurance, etc.
Difference between an Annuity & a Life Insurance Plan
The differences between an annuity & a life insurance plan are mentioned below:
| Basis of Difference | Annuity Plan | Life Insurance Plan |
| Objective | These plans aim at providing a regular income flow throughout retirement. This plan provides financial security & ensures that savings do not get exhausted. | This plan aims to provide financial protection to the policyholder’s family members, securing their financial future. |
| Payment Structure | The payment towards the premium has to be made either periodically or in a lump sum. The annuitant will receive the returns either on an immediate basis or after a specific duration. | Under this plan, the policyholder is required to make payments towards the premium on a regular basis. & in case of his demise, the sum assured would be received by their beneficiaries. |
| Risk & Return | Risk under this plan depends on the type of annuity plan. This means that in the case of fixed annuities, the annuitant will receive assured returns with low risk. In the case of a variable annuity, the annuitant receives higher returns at higher risks. | Under this plan, the risk pertains to an insurance service provider, as they are supposed to pay the sum assured on the policyholder’s demise. The returns remain fixed in case of term insurance, but vary in case of ULIPs. |
| Tax Implication | The returns received are taxable according to the income tax slab of the annuitant. &, the investment growth gets tax deferred till the time payouts start. | The premium paid towards the plan is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961. The death benefits received are exempt from tax u/s 10(10D). |
| Target Audience | This plan best suits those who are close to their retirement or are already retired & want a regular stream of income post their retirement. | This plan best suits those individuals who want to offer financial security to their dependent family members. |
| Duration of Benefits | The payouts would be received throughout the annuitant’s life. Also, in certain cases, they are even received after their death. | The payout here is paid after the policyholder’s death. |
Types of Annuity Plans
Provided are the different types of annuity plans:
- Variable annuity plans
- Fixed annuity plans
- Immediate annuity plans
- Deferred annuity plans
Types of Life Insurance Plans
Provided are the different types of life insurance plans:
- Endowment life insurance
- Term insurance plans
- Whole life insurance plans
- Unit-linked insurance plans
- Money-back insurance plans
- Child insurance plans
Whether both the Annuity Plan & the Life Insurance Plan be considered?
Provided are some of the criteria, depending on which an individual can decide to choose both the plans, namely annuity & life insurance:
- Family protection
If financial security for the family members is your objective, it will help repay the loans, maintain the family’s lifestyle, etc.
- Steady Retirement Income
A steady retirement income can be obtained by an annuity plan, which will help manage routine expenses, medical expenses, long-term financial requirements, etc. An Annuity calculator will help ascertain the returns & the premium amount of the plan.
- Balances your Requirements
On one h&, a life insurance plan provides financial protection to the dependents of the policyholder, an annuity plan on another h& helps during the retirement period. This helps balance two different needs by buying two different plans, avoiding the burden of two choices on one single plan.
- Supports Long-Term Financial Planning
Both plan offers a combination of protection & income, helping at each stage of life, providing mental peace.
- Reduces Financial Uncertainties
Both plans combined help build wealth & secure the family’s financial future, which ensures that an individual is not overly dependent on the market-linked investment plans.
Conclusion
Life insurance & annuity plans help meet the different purposes & thus help select an appropriate plan by assessing the financial responsibilities & financial commitments of the family. On one hand &, the life insurance plans offer life protection to the family members, & annuities on the policyholder’s demise; on the other hand &, annuities offer retirement benefits post retirement.
