While many investors are somewhat leery about using insurance products to save for retirement and to generate future income, the reality is that many of these vehicles can provide guarantees that “regular” investments just simply can’t match.

Take, for instance, fixed indexed annuities and indexed universal life insurance. Both of these offer the opportunity to attain market-linked growth through the performance of one or more underlying indexes. But, if the index(es) performs poorly, there are no losses incurred.

Each of these can also help you supplement income in retirement. But even though there are many similarities between fixed indexed annuities versus indexed universal life insurance, there are also some big differences. That is why it is critical to understand how each one works, and whether or not they could work for you.

Understanding Fixed Indexed Annuities

Fixed index annuities are a type of fixed annuity. However, they differ from regular fixed annuities in the way their return is determined. For instance, a fixed index annuity tracks the performance of one or more market indexes, such as the S&P 500 or the Dow Jones Industrial Average (DJIA).

When the index performs well, the fixed index annuity is credited with a positive return, usually up to a set “cap,” or maximum. In return for this limited upside, there is no risk of loss in a fixed index annuity. That’s because, if the underlying index (or indexes) perform poorly during a given period of time, the annuity is simply credited with a minimum “floor” amount that is in the neighborhood of 0% – 2%.

Fixed index annuities (FIAs) typically also offer a fixed account that provides a set amount of interest. So, there is the option of placing some (or even all) of your funds in this segment of the FIA contract.

Similar to with other annuities, your money that is inside of a fixed index annuity is allowed to grow on a tax-deferred basis. This means that no tax will be due each year on the gain. Rather, taxes will be incurred at the time of withdrawal. This can allow the funds to grow and compound over time faster than they could in a taxable account.

Fixed index annuities can also be “annuitized,” or converted to an income stream. There are usually several different options for taking income from fixed indexed annuities. For instance, income could arrive for a set time period, such as 10 years. Or you could choose for it to arrive regularly for the rest of your life – regardless of how long that may be.

The amount of income that you receive is based on several different criteria, too, such as your age, the interest rate set by the insurance company, and how long you want the income payments to last.

How Indexed Universal Life Insurance Works

While indexed universal life (IUL) insurance is a type of coverage, this financial vehicle can provide much more than just death benefit protection. These policies also offer a cash value component that grows on a tax-deferred basis and has a return that is based on the performance of one or more underlying market indexes (such as the S&P 500).

So, if you have “maxed out” your yearly deposits to an IRA (Individual Retirement Account) and/or employer-sponsored accounts like a 401(k), an indexed universal life insurance policy can allow you to keep funding a tax-advantaged financial vehicle.

The funds in an IUL policy may be accessed via withdrawals or loans. The gains on the withdrawals are taxed as ordinary income. However, if funds are taken as loans, they are tax-free, giving you more net spendable income in the future.

With tax rates anticipated to rise, this can provide you with more certainty. In addition, unlike traditional IRAs and employer-sponsored retirement savings plans, there is no maximum annual contribution limit with IUL.

In addition, given that the product also has a death benefit, beneficiaries are covered financially for various needs, even if the unexpected occurs. Life insurance death benefits are received income tax-free by the beneficiary(ies).

FIAs versus IUL

So, which is better for you – a fixed indexed annuity or an indexed universal life?

The answer to that is it depends. There are a number of factors to consider before making a long-term commitment to an annuity or life insurance policy. And, because there are many moving parts in these plans, it is recommended that you discuss your short- and long-term goals with an annuity specialist.

At Annuity Gator, our mission is to educate consumers and financial professionals on how to grow and create retirement assets and income. We can also help you with comparing various options to narrow down which – if any – would work for your specific needs.

So, if you would like to set up a time to talk with an Annuity Gator retirement income expert, feel free to contact us by phone at (888) 440-2468 or via email, through our secure online contact form. We look forward to assisting you.

Fixed Indexed Annuities versus Indexed Universal Life Insurance