How Do Annuities Differ from Life Insurance?

Before discussing straightaway the difference between life insurance and annuity it is necessary to understand what life insurance and annuity actually are?

Life insurance is a contract between the policy owner and the insurer in which the insurer agrees to pay a sum of money upon the occurrence of death of owner of the insurance policy. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals.

There are three parties in a life insurance transaction the insurer, the insured, and the owner of the policy or policyholder. The owner and the insured are often the same person. The owner of the policy is called the grantee because he or she will pay for the policy. Another important person involved is the beneficiary. The beneficiary is the person or persons who will receive the policy proceeds upon the death of the insured. The beneficiary is not a party to the policy, but is designated by the owner, who may change the beneficiary unless the policy has an irrevocable beneficiary designation.

While annuity contract is created when an individual gives the insurance company money which may grow tax deferred and then can be distributed back to the owner in several ways. The main characteristic of all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons named in the contract.

Now let us proceed towards the difference. Life insurance provides a measure of financial security for one's family after he/she dies but in between it does not gives you the benefit that annuity can provide you. The income in annuity begins immediately in case of immediate annuity or after a certain time period of time in deferred annuity. Furthermore while some annuities pay income as long as one live, some other annuities continue paying money to the family after the death of the owner of the contract.