Although everyone’s financial goals are different, there are some parameters where most investors across the board typically agree. These include keeping principal safe (or at least as safe as possible, given the potential return), and securing at least some form of guarantee.
The good news is that there are a variety of financial vehicles that offer one or the other of these…or even both. For instance, an FIA, or fixed index annuity, offers the opportunity for market-linked growth, along with the safety of principal in any market.
Likewise, indexed universal life insurance provides a way to grow funds in a tax-advantaged manner, and if the policy is structured properly, it can also provide you with tax-free income in retirement.
But even though these products may initially sound like “can’t lose” options, it can take a good understanding of how the financial tools work in order to truly determine whether or not they are right for you.
Dissecting Indexed Universal Life Insurance
Indexed universal life insurance, or IUL, is a type of permanent life insurance policy. That means it offers both death benefit protection and cash value. The growth of the cash value is based primarily on the performance of a market index like the S&P 500 or the Nasdaq 100.
Gains in the index are added to the return of the policy’s cash value – usually up to a set cap. If there is a loss in the index, though, there is no negative return in the policy’s cash value, but instead, there is just a 0% credited for that period.
Throughout the years, more and more investors have been using indexed universal life insurance as a retirement saving and income supplement. That’s because they can still garner tax-deferred growth – even if they’ve already maxed out other tax-advantaged plans like IRAs and 401(k)s.
In addition, indexed universal life insurance cash value can help to supplement retirement income in the future – and this income can be received tax-free. Here, for instance, by accessing funds through the policy loan feature, there is technically no taxable income received. This can allow you to put more money in your pocket during retirement, regardless of what the then-current income tax rates are.
Fixed Index Annuities – Are They Really the Best of All Worlds?
A fixed index annuity, or FIA, is also a type of insurance product. Here – at least for most people – the primary goal is the eventual receipt of income in retirement. During the annuity’s growth – or accumulation – period, the return is based in large part on the performance of an underlying market index, such as the S&P 500.
When the index performs well, the annuity’s account is credited with a positive return, oftentimes up to a certain maximum, or cap. If the underlying index performs poorly (i.e., in the negative) during a given year, though, the account does not lose value.
Rather, it is simply credited with a return of 0% for that time period. So, while there is no gain in the contract then, there is also no loss – and this can be extremely appealing during years where the index falls by 10%, 20%, or more!
As with other types of annuities, the growth inside of a fixed index annuity is tax-deferred. So, it can grow and compound over time without being held back by Uncle Sam. And, when the time is right, income can be switched on. If the lifetime income option is chosen, you can count on it for the remainder of your lifetime.
IUL or FIA…or Both?
So, which is better for you – an IUL, an FIA, or both?
The answer here is that it depends.
Because all scenarios are different, it can require different financial planning tools to get you where you want to go. But having a way to compare financial products against your goals is a great place to start.
That’s where Annuity Gator can help. We specialize in providing in-depth annuity information to consumers – and a part of that includes plugging in your personal goals and parameters so that you can narrow down the financial tool (or tools) that are right for you.