Written by : Knowledge Centre Team
2025-08-02
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7 minutes read
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You spend your life working hard, making sacrifices, and carefully planning so your loved ones can enjoy a secure and fulfilling future. Whether it’s funding your child’s education, creating a safety net for your spouse, or building a comfortable retirement for yourself, every decision you make is rooted in love and responsibility.
Key Takeaways
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But life doesn’t always follow our plans. What if an unexpected tragedy strikes and you’re no longer around? Would your family still be able to sustain the lifestyle you've worked so hard to provide? On the other hand, what if life blesses you with longevity, say, living till 95 or even 100? Would your savings last? Would you want to depend on your children or relatives, or continue working in your 80s just to make ends meet?
This is why holistic financial planning is about preparing for both extremes of life.
When mapping your financial journey, there are two critical questions you must address:
What if you die too soon? Will your family be able to stay financially stable without your income?
What if you live too long? Will your savings be enough to support you for 20, 30, or even 40 years of post-retirement life?
True financial security means being ready for both possibilities. With the right combination of life insurance, retirement planning, and smart investments, you can ensure peace of mind for your family and for your future self. Two of the most common instruments designed to serve these purposes are life insurance and annuity plans.
Life Insurance vs Annuity: Key Differences
The similarities between the plans or the shared characteristics may lead you to use the terms interchangeably. However, you need to understand the significant differences between the two. So, when you plan your financial journey, you know exactly what you want. Let us look at some differences between life insurance and annuity plans:
Life Insurance Plans | Annuity Plans |
Used for the protection of dependents and to 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 a life insurance plan can be fully tax-exempt | Annuity payouts are taxable as salary in the year they are received |
Only a whole life insurance plan or a whole life term plan works as a legacy plan | Almost all annuity plans can work as a legacy plan if there is an unutilised amount |
Similarities Between Life Insurance and Annuities
Now that you understand how life insurance and annuity plans differ, it's important to know that they are not mutually exclusive. In fact, a smart financial strategy often involves a combination of both to address life’s two biggest uncertainties: an untimely demise or an unexpectedly long life.
Life insurance ensures your loved ones are financially secure if something happens to you, while an annuity ensures you have a steady income stream if you live well beyond your earning years. Together, they create a well-rounded, future-ready financial plan.
The similarities between the two 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
Which One to Choose- Annuity or Life Insurance?
Before choosing the right annuity plan, it’s important to understand how these plans function, how payouts are handled, and what tax implications they carry.
Understanding the Purpose: Personal Income vs Family Security:
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 that 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 of you is alive.
Thus, an 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 dependents’ financial goals and your life financially.
Timing Matters: Immediate vs Deferred Benefits
The other difference between life insurance and an annuity plan lies in the time you receive the plan's 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 ₹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.
Active Life vs Afterlife Benefits:
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 long as you (or your spouse in case of a joint life annuity) are alive.
While life insurance plans like term insurance will only work after your demise.
Life Cover As a Part of an 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 the 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.
Tax Implications:
The annuity payout you receive is taxable as salary income in the financial year you receive it. Thus, if you receive more than ₹2.5 lakhs (₹ 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:
- Your annual investment in the plan exceeded 10% of the base life cover of the plan
- You invested more than ₹2.5 lakhs in a year in ULIP plans (bought after 1st Feb 2021)
Legacy Planning: How Each Option Supports the Future?
When you invest in a lifetime annuity plan, you also invest in a legacy plan. Lifelong annuity, including the 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 maximise the benefit and safety for your family and yourself. Annuity plans by Canara HSBC Life Insurance come with benefits to ensure that you can meet your final financial goals with confidence.
Life Cover as a Part of an 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 the option to do so. 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.
Conclusion
Life is unpredictable, but your financial planning shouldn’t be. By understanding how life insurance and annuity plans differ and complement each other, you can craft a more well-rounded, future-ready strategy.
Life insurance ensures that your loved ones stay financially secure even in your absence, while annuity plans help you maintain independence and dignity in your golden years by providing a stable income. Instead of choosing one over the other, consider combining both to create a strong foundation that supports not only your family’s goals but also your own peace of mind.
With plans like Pension4Life by Canara HSBC Life Insurance, you can make thoughtful decisions that protect your present and secure your future.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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