What are the differences between annuities and life insurance?
Although both annuities and life insurance offer a death benefit, which means that the designated beneficiary can receive a lump sum or periodic payments in the event of the insured’s death. However, the primary purpose of annuities is not to offer death benefit, but to help policyholders make a better plan for retirement by providing a stable stream of income, whereas life insurance is meant to provide financial protection against premature death. In short, annuities are designed for individuals who are concerned about outliving their retirement savings due to longevity.
In other words, annuities are like “self-made income” that can help policyholders convert their savings into a long-term, stable cash income, establishing a reliable retirement income stream. Annuities are considered a conservative income tool with stable returns. They are particularly suitable for those who are approaching or already in retirement and seek secure and stable investments, but are concerned about depleting their assets without a steady income stream.
Differences between annuities and death benefit in life insurance
The difference between the death benefit in annuities and life insurance is that life insurance primarily provides financial assistance to the beneficiary upon the insured’s death. Therefore, as long as the insured passes away and meets the policy conditions, the beneficiary will receive a death benefit.
In contrast, the beneficiary of an annuity plan may not necessarily receive a death benefit. Generally, if the insured passes away after the “annuity payment period” or “guarantee period” has ended, the beneficiary will not receive a death benefit. However, if the insured passes away during the “annuity payment period” or “annuity income period,” the beneficiary may receive a death benefit, which may vary:
|Annuity Payment Period
|The beneficiary can generally receive a death benefit equal to at least the total amount of premiums paid if the insured passes away during the annuity payment period
|Annuity Income Period
|Different plans have different arrangements/choices for the death benefit
Types of annuities and their differences
Annuity products can be divided into 2 main categories:
- Immediate annuity
- Deferred annuity
With an immediate annuity, the policyholder can start receiving annuity payments immediately after paying a lump sum premium (usually distributed a month after the policy becomes effective). Deferred annuities, on the other hand, typically accept premium payments in instalments, and the funds are held for a period of time, usually a minimum of 10 years or until the policyholder reaches age 60, before annuity payments begin. Regardless of the type, some plans offer fixed-term annuities, while others offer lifetime annuities or annuities until the insured reaches age 100.
The HKMC Annuity Plan launched by the Hong Kong government is an example of an immediate annuity. Once the policyholder is 60 years old or above and pays a lump sum premium, they can receive a fixed amount of regular payments for life.
Is there any loss if I surrender early?
An annuity is also an insurance product with a specific term, which can last for several decades, including the payment and income periods. Surrendering or terminating an annuity policy early may result in financial losses, which means that the amount received may be lower than the premiums paid.