Comparing Annuities and Indexed Universal Life Insurance (IUL) (2024)

Similarities Between Annuities and Indexed Universal Life Insurance

Annuities and indexed universal life (IUL) insurance are similar because both are insurance products. Many insurance companies sell both IUL policies and annuity contracts, and both products are regulated by state insurance commissioners.

IUL insurance and annuities also share some of the same features. As Mark Stewart, an in-house CPA for Step By Step Business, told Annuity.org, both products can include a death benefit and offer tax-deferred growth on investment earnings.

An IUL policy is probably most like an indexed annuity. The growth of an indexed annuity is tied to the growth of an equity market index like the S&P 500. Similarly, an indexed universal policy earns interest credits based on the performance of an external investment index.

Both indexed annuities and IUL insurance policies have some level of guaranteed growth. Even if the linked index performs poorly, both types of contracts are guaranteed to earn a fixed rate of interest.

Annuities and IUL products are not suitable for everyone. Investing in these relatively low-yielding vehicles can expose you to opportunity cost. Stronger returns may be achieved by investing in publicly traded stocks and alternative investments. However, the higher return potential comes with elevated risk levels.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

Differences Between Annuities and Indexed Universal Life Insurance

Although they are both insurance products that grow in value based on an external index, annuities and IUL insurance have quite a few major differences. The biggest difference between the two is that they serve different purposes in your personal financial planning.

The primary purpose of an annuity is to create a stream of income you can’t outlive. Financial planners often recommend annuities as a strategy for supplementing retirement income from other sources like Social Security or a 401(k).

Conversely, an IUL policy mainly serves to provide income for your beneficiaries after you pass away. The payout on an IUL policy doesn’t occur until the policyholder passes away, while annuities distribute income payments throughout an annuitant’s lifetime.

Further differences between the two products include the way they accumulate value. “Annuities can offer fixed or variable returns, while IUL insurance’s returns are linked to the performance of an equity index,” Stewart told Annuity.org. Different types of annuities offer different growth returns, whereas an IUL policy is just one type of universal life insurance with one way of calculating returns.

Additionally, Stewart pointed out that “annuities generally lack a cash value component, whereas IUL insurance can accumulate cash value over time.” This means that an IUL policyholder could borrow money against their policy up to its cash value. However, no such provision exists for annuities.

Who Should Buy an Annuity?

An annuity’s function as a guaranteed source of income makes it more appropriate for those nearing the end of their working years. “Annuities are typically designed for the closer stages of retirement,” Sherice Mangum, a life insurance broker and owner of Fire Financial Partners, told Annuity.org.

Annuity customers tend to be between the ages of 40 and 65. They might be looking to create a stream of income in retirement that they can’t run out of. An annuity can be used to leave a death benefit to an heir, but this is a secondary perk for most annuity customers.

If your main goal is to leave some income to your beneficiaries, an annuity might not be the most appropriate product, as they can be considerably more expensive than life insurance policies.

Who Is an IUL Best Suited For?

Because an indexed universal policy is a form of life insurance, the main reason to buy one is to provide income for your dependents after you die. An IUL policy offers the features of a flexible death benefit and a cash value that will steadily grow with an index.

The growth of that cash value means that IUL policies can be beneficial for customers younger than the typical annuity customer. “IULs are typically better for the younger crowd because they have time to accumulate growth for personal or business needs,” Mangum told Annuity.org. Universal life insurance buyers are typically between 30 and 60 years old.

An indexed universal life insurance policy balances risk and return in a way that’s unique to universal life insurance. If you want a policy that has greater return potential than standard universal life without the risk of full market participation that comes with a variable universal life policy, then indexed universal life insurance might be the best solution.

Deciding Which Is Right for You

To decide whether an annuity or an IUL policy is right for you, you must first understand what your personal financial goals are.

As previously stated, you might choose an annuity if your goal is to set up income for yourself in retirement. If you instead want to set up income for your beneficiaries, then you might choose IUL insurance.

You may even determine that both products have a place in your financial plan because their purposes are so different. Mangum advised that having both an annuity and IUL insurance can be a solid strategy. “Have the IUL for accumulation to help cover future taxes and the estate, [and have] an annuity to shield [against] running out of money in retirement,” Mangum told Annuity.org.

Evaluating your risk tolerance is another crucial component of choosing either of these products. When choosing an annuity, you’ll have a range of options with varying levels of risk and return potential. The risk of an IUL policy is less than that of a variable universal policy but more than other types of life insurance that aren’t tied to an index’s performance.

Finally, costs and fees are an important consideration when purchasing insurance products – whether they’re annuities or life insurance. When you have IUL insurance, you must continue paying the premiums regularly for your coverage to remain active.

Annuities typically require a lump sum premium payment but can still charge annual fees depending on the type of annuity. Variable annuities, for example, typically charge mortality and expense risk fees, administrative fees and expenses for subaccount management.

Editor Malori Malone contributed to this article.

Please seek the advice of a qualified professional before making financial decisions.

Last Modified: October 30, 2023