Annuities as Life Insurance

Although annuities are sold by companies that also sell traditional life insurance policies, often from the same website or brochure, it does not mean that annuities and life insurance are the same. In fact, many consider annuities to be the reverse of pure life insurance. However, there are certain options that are available in annuity contracts that allow them to have some life insurance benefits.

Life insurance is usually purchased to insurance someone against an unexpected death, and subsequently, loss of income. The person that is insured has beneficiaries that he wants to provide money too. For example, the holder may only want to insure that a beneficiary has enough to cover burial expenses. On the other hand, an insurance policy can provide funding to beneficiaries, such as a spouse or child, to cover debt and cost of living expenses.

As the reverse of pure life insurance, a basic lifetime annuity is not designed to protect against the unexpected death of the owner. Instead, it is designed to protect against the investor living longer than expected. It is an investment product that can be purchased with a lump sum or with premiums made over a period of time which will then allow the holder to receive income for the rest of his life. These products are become increasing popular to insure against the risk of the investor exceeding their life expectancy.

For an annuity to be considered as an alternative to life insurance, it would have to be purchased with a death benefit option, and even then it does not fully substitute life insurance. Usually at a minimum, the beneficiary of an annuity receives a payment equal to the sum of the payments made to the insurance company, less any partial withdrawals. For example, if a client purchased an annuity for $50,000 but had already received $5,000 in payments, then the investor's beneficiaries would receive $45,000.

If the original holder of the annuity lived "longer than expected" and had received payments beyond the original investment, then the beneficiaries would be less likely to receive a pay out. To demonstrate this point, assume that the same annuity that was used in the example above was purchased as a lifetime annuity. The person purchased the annuity for $50,000 and received $5,000 per year for life. If the person lived fifteen years, they would have received $75,000. There would be no principle amount left for the beneficiaries to receive.

Exact death benefits vary, so it is important to understand the individual contract before purchasing an annuity. For example, some contracts allow the purchaser to "step-up" the death benefit. If this feature is available, it means that there is a guaranteed minimum death benefit that is payable to the beneficiary regardless of the purchase payment or withdrawal status.

Lifetime annuities with death benefits can be used to insure the policy holder against living too long and also provide a payout to beneficiaries, like a life insurance policy. However, regular death benefits and "stepped-up" death benefits will come as an additional fee to an annuity contract and, therefore, should be compared against the alternative pure life insurance options before a purchase is made.