If you’re considering taking out life annuity, you may be wondering precisely how this type of policy differs from regular life insurance. One main distinction comes in the way in which the policy is paid for, with a lump sum typically being paid by the customer in return for a steady stream of income paid in the form of premiums – however, there are other differences too.

Whereas life insurance pays out in the event of the policyholder’s death, life annuity is rather a means to obtain income for your retirement, and in this way is similar to other types of pension plans. However, just because you are already satisfied with your current pension situation doesn’t mean you shouldn’t consider life annuity to supplement your payments, as it could prove especially beneficial in the event that your pension does not generate the return on investment hoped for.

One way in which life annuity is similar to life insurance though is that the funds provided at the end of the policy term can also be paid to family members and other dependents in the event of the policyholder’s death, if this is stated in the terms of your contract. The age at which you sign up for your life annuity plan will also help determine the type of policy you require – whether it’s an immediate policy that will begin paying out within 12 months of the account opening, if you have already passed or will soon enter retirement age, or a deferred policy, which can be taken out earlier in life and paid in instalments, as opposed to a lump sum.

As with other life insurance products, you can usually find better rates on life annuity policies by opening an account while you are comparatively young and healthy – and thus at lower risk of having to cash in on the policy. However, even policyholders who are elderly or have serious health problems could benefit greatly from taking out impaired life annuity, and be eligible for a higher level of income from their provider.

Choosing to buy an annuity is like any other long-term financial decision, and needs to be made after sufficient time and research. Speaking to a financial adviser could help you decide whether life annuity would truly benefit you as a supplement to your pension, and they could also direct you to the companies offering the most competitive rates.

The author of this article is a part of a digital blogging team who work with brands like Standard Life. The content contained in this article is for information purposes only and should not be used to make any financial decisions.