Difference between Life Insurance and Annuity Plans

Written by : Knowledge Centre Team

2021-08-13

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You plan and work towards giving a beautiful future to your loved ones. If an unfortunate event happens, what happens to their future? Secondly, you may plan your finances till 80 years of life, but what if you live for 100 years? You would not like to work in your 80s, so you must be prepared.

When you plan for your future and do financial planning, you have to prepare for two scenarios:

What if you die soon?
What if you live too long?

Life Insurance vs Annuity

The similarities between the plans or, the shared characteristics may lead you to use the terms alternatively. However, you need to understand the significant differences between the two. So, when you plan your financial journey, you know what exactly you want. Let us look at some differences between life insurance and annuity plans:

Life Insurance Plans	Annuity Plans
Used for protection of dependents and meet a future financial goal	Used for income protection for self and spouse
Life cover cannot be deferred	An annuity can be deferred for a few years after the investment
The protection feature only works after your untimely demise	Annuity plans work only until you or your spouse is alive
Life insurance plans generally do not lead to an annuity	Annuity plans may carry a small life cover as well
Partial or maturity pay-out from life insurance plan can be fully tax-exempt	Annuity pay-outs are taxable as salary in the year they are received
Only whole life insurance plan or whole life term plan work as a legacy plan	Almost all annuity plans can work as a legacy plan if there is an unutilised amount

Life Insurance & Annuities

To deal with both these scenarios, you need to have two different plans - Life insurance and annuities. Both of these are long-term financial plans, but there are differences. Life insurance provides economic protection to your family if you die, while annuity guards against outliving your assets.

The similarities between both the plans are as follows:

Long-term investment and protection plans
Can offer inflation and tax-protected growth
Safest long-term investments
Life insurance plans can lead to an annuity
Annuity plans often carry a life insurance cover

Annuity is for Self

When you buy an annuity plan, you invest for your income security, especially for a time when you will not have an active source of income like employment. On the other hand, when you buy a life insurance plan, you invest in a better future for your loved ones.

The best annuity plans are those which can secure your life after retirement. For example, the Pension4Life plan from Canara HSBC Life Insurance offers a guaranteed income till your natural demise. In the case of a joint life plan, the annuity will continue until either one of you are alive.

Thus, annuity ensures financial safety for you. However, the purpose of a life insurance plan is to ensure the financial safety of your dependents if anything happens to you.

Build an adequate corpus for your child’s education and marriage goals
Ensure that the child will have the planned financial support even in the case of your early demise

Thus, life insurance is the best investment to protect your dependent’s goals and life financially.

Annuity can be Deferred

The other difference between life insurance and an annuity plan lies in the time you receive the plan benefit. The life insurance benefit is very straightforward and available immediately.

For instance, a life insurance benefit ensures that in the case of your death, your beneficiary receives the lump sum amount (or regular payment starts). This benefit is available from the moment your premium is accepted by the life insurer.

However, with annuity plans, you can choose to receive monthly or quarterly regular payments immediately, or a few years later. It means you can invest in an annuity plan now and postpone the regular payments to start a few years later.

For example, assuming you have a retirement corpus of Rs. 50 lakhs ready at the age of 55, but you will need a regular income only after the age of 60. You can invest the amount in the Pension4Life plan and select the option for a regular income to start once you turn 60, that is, five years later.

Also, if your annuity plan also carries a life cover, the cover will be available immediately after purchase.

Annuity Works During Life

The life insurance plans come to benefit you in the unfortunate event of your death, injury or illness. On the other hand, an annuity plan works while you are alive.

When you invest in an annuity plan you can choose to continue the annuity for a limited time or until your natural demise. Either way, the annuity plans only continue so far you (or your spouse in case of a joint life annuity) are alive.

While the life insurance plans like term insurance will only work after your demise.

Life Cover As A Part of Annuity Plan

An annuity is not just about regular income post-retirement. If you want to get the benefits of life insurance in the same plan, you have an option to do it. Life cover ensures that your spouse or your nominee can enjoy the same financial security you provided even after you.

Almost all the annuity plans provided by life insurers offer life cover options. Few others like Pension4Life from Canara HSBC Life Insurance also provide accidental and critical illness cover options.

Annuity Pay-out is Taxable

The annuity pay-out you receive is taxable as salary income in the financial year you receive it. Thus, if you receive more than Rs. 2.5 lakhs (Rs 3 lakhs in case of the old regime) in a financial year after the age of 60 the excess amount will be taxable.

However, any amount you receive from a life insurance policy, be it on maturity or before, after the lock-in period is exempt from tax except when:

a. Your annual investment in the plan exceeded 10% of the base life cover of the plan

b. You invested more than Rs 2.5 lakhs in a year in ULIP plans (bought after 1st Feb 2021)

Annuity Works as a Legacy

When you invest in a lifetime annuity plan, you also invest in a legacy plan. Lifelong annuity including Pension4Life plan guarantees annuity payments until your ultimate demise. After your demise, the remaining amount is made available as a lump sum payment to your nominees.

In the case of joint life policies, the pension may continue until the death of your surviving spouse. However, even in this case, the annuity plan will return the remaining amount to your nominees.

Thus, it is pretty clear there is a significant difference between life insurance and annuity plans. While planning your financial journey, you should mix the two to maximize the benefit and safety for your family and yourself. Canara HSBC Life Insurance annuity plans come with benefits to ensure that you can meet your final few financial goals with confidence.

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