Life insurance and annuities are essential financial planning tools for providing future independence. Each may be part of a comprehensive financial plan depending on one's situation and goals.

But first, it’s essential to understand what each is.

• Life insurance—Life insurance is a contract with an insurance company in which, in exchange for premium payments, the company promises to pay a sum of money, called a death benefit, to beneficiaries upon your death.
• Annuity— An annuity is a contract issued and distributed by an insurance company and bought by individuals. The insurance company pays the purchaser a fixed or variable income stream in exchange for the premium.

Here’s how to determine which may fit your needs, depending on your circumstances.

1. You have dependents

Life insurance may be appropriate if your dependents count on your income. Apart from providing independence to your loved ones in case of your untimely death, some life insurance policies also offer investment options, allowing the death benefit to grow over time. Life insurance can provide for lost income and pay for dependent care and education.

2. Retirement income is important to you

Annuities may be appropriate if you're concerned about a steady income stream throughout retirement. Annuities provide a steady income stream you can't outlive, making them suitable for those seeking confidence throughout retirement.

3. Cost is a factor

It's crucial to consider the cost implications of each. Annuities often have higher fees than life insurance policies and may come with riders at an additional cost.

Life insurance premiums can vary, depending on the type of policy and death benefit amount. Term life insurance may be more affordable but doesn't accumulate cash value, while whole life insurance accumulates cash value but has a higher premium.

4. You have debt

The life insurance death benefit can help pay off the deceased's debt. It provides the means to pay off a mortgage, loans, etc., so the debt obligation doesn't pass to family members.

5. Access to cash is vital

Annuities have surrender fees, which can be expensive but may be reduced over time. However, taking money before maturity will deplete the annuity's value.

The policy owner can access the cash value anytime through a policy loan. However, taking a policy loan means an interest rate applies, and the death benefit may be less if the owner dies before repaying the loan.

The case for both

An annuity and a life insurance policy might be suitable, depending on your situation. For instance, you could invest in life insurance to safeguard your loved ones' financial independence and purchase an annuity to help provide a steady income stream during retirement.

Using a portion of the premiums paid into the life insurance policy to purchase an annuity without taking a policy loan is also possible.

It's essential to analyze your situation, talk with a financial or insurance professional, and decide which—an annuity or life insurance—suits your needs and goals.