IUL vs. Annuity: Which Retirement Strategy Is Better?

An indexed universal life (IUL) insurance policy and an annuity share tax-deferred growth and index crediting options, but they serve different purposes. The table below compares the two products across the features that matter most for retirement planning:

An indexed universal life (IUL) policy is a type of permanent life insurance that builds cash value based on the performance of a stock market index, such as the S&P 500. Your money isn't invested directly in the market. Instead, the insurer credits interest to your cash value, usually with a 0% floor that protects against market losses and a cap rate that limits annual gains.

Your premiums pay for the cost of insurance, policy fees and cash value growth. As long as your policy remains adequately funded, you can adjust your premium payments within certain limits.

The cash value grows tax deferred, and you can access it through tax-free policy loans during retirement as long as your policy stays in force and doesn't become a modified endowment contract (MEC). Keep in mind that insurance costs increase as you age, so consistent funding is important to keep your policy active and preserve its tax advantages.

An annuity is an insurance contract that turns your savings into future retirement income. You can fund it with a lump sum or a series of payments. In return, the insurer provides income for a set number of years or for the rest of your life. Unlike life insurance, annuities don't require a medical exam.

There are three main types of annuities:

• Fixed annuities earn a guaranteed interest rate.
• Variable annuities invest in the market, so returns can rise or fall.
• Fixed indexed annuities tie growth to a market index, usually with a floor that protects against losses and a cap that limits gains.

Your money grows tax deferred, but withdrawals are taxed as ordinary income. Most annuities also have a surrender period, usually six to 10 years, during which large withdrawals may trigger surrender charges.

Both IULs and fixed indexed annuities can grow based on the performance of a stock market index, but they work differently.

An IUL usually has a 0% floor that protects against market losses and a cap rate of 8% to 12% that limits annual gains. Keep in mind that insurers can change cap rates over time. Policy fees and rising insurance costs also reduce overall growth.

A fixed indexed annuity also uses a floor and cap but doesn't have life insurance costs, so more of your earnings stay in the account. A variable annuity has greater growth potential because it's invested in the market, but your account can also lose value.

An IUL provides retirement income through policy loans, which are tax free as long as your policy stays in force. You control how much and when you withdraw, but taking too much can cause your policy to lapse.

An annuity provides income through scheduled withdrawals or guaranteed lifetime payments. Many annuities can continue paying income for as long as you live. Annuities are a good choice if predictable retirement income is your top priority.

Both IULs and non-qualified annuities grow tax deferred, but withdrawals are taxed differently.

With an IUL, policy loans are tax free, and the death benefit is income tax free for your beneficiaries.

With a non-qualified annuity, withdrawals are taxed as ordinary income, and withdrawals before age 59½ are also subject to a 10% IRS penalty.

An IUL includes insurance costs, administrative fees and optional rider charges. Insurance costs increase as you age, which can reduce your cash value growth over time.

Annuity costs depend on the type of contract. Fixed and fixed indexed annuities have few or no annual management fees, while variable annuities charge investment and insurance fees. Most annuities also have a surrender period during which large withdrawals may trigger penalties.

The right choice depends on your retirement goals. An IUL is better if you need permanent life insurance and tax-advantaged cash value, while an annuity is better if you want guaranteed retirement income.

Choose an IUL If You:

• Need permanent life insurance.
• Have already maxed out your 401(k) and IRA.
• Want tax-advantaged retirement income and a tax-free death benefit.
• Qualify for life insurance and can fund the policy over the long term.

Choose an Annuity If You:

• Want guaranteed lifetime income.
• Don't need life insurance.
• Can't qualify for life insurance because of your health.
• Have a lump sum, such as a 401(k) rollover or inheritance, to invest.

Consider Both If You:

Some retirees use both products together. An annuity provides guaranteed income for essential expenses, while an IUL offers flexible, tax-advantaged income and a tax-free death benefit for beneficiaries. Together, they can provide both income security and estate planning benefits.