When comparing Indexed Universal Life Insurance (IUL) with Variable Annuities, individuals and professionals in the higher income range typically view the IUL as being a more flexible policy than the Variable Annuity. While both are considered life insurance company products, they have similarities and differences. It is important for you to understand that the differences in available death benefits, the opportunity for tax-free loans, the flexibility of contributions, and possible risk factors are composed within the two options and need to be considered.
As with most investment products, the IUL and Variable Annuity have both an upside and downside risk. Building a retirement fund is achieved through both products. Higher earnings are entirely possible through IULs and Variable Annuities compared to fixed-rate retirement benefits, such as IRAs offered by traditional banks. There is the risk of losing earnings over a period of time depending on the performance of the investment. Variable Annuities comprise of investing contributions into a mutual funds account. However, an Indexed Universal Life policy earns interest based on the rise of the stock market index. In the event of a decline in the mutual fund or stock market index, both the life insurance products will show a decrease in the retirement fund by delivering reduced earnings.
Contributions from variable annuities are invested in mutual funds. These investments are made by your insurance company at your discretion. Stocks and bonds are the underlying securities with variable annuities. By converting a Variable Annuity into monthly payments, you are able to make a request for guaranteed life payments.
The Indexed Universal Life (IUL) policy will pay you interest as the stock market index increases. An example of such stock market indices would include the S&P 500 and the NASDAQ. Additionally, with Indexed Universal Life policies you have the ability to contribute as much as you prefer without IRS maximums and obtain finances for business or retirement through tax-free loans.
Both the Indexed Universal Life policy and Variable Annuity offer a death benefit which is reduced should you need to borrow or withdraw from your account. With a Variable Annuity, there is a guaranteed minimum death benefit which is equal to what you contribute. However, this may or may not be sufficient. In the event that the benefit is not adequate, a death benefit rider can be added to the policy, which offers protection for declines in the value of the contract based on market conditions.
Indexed Universal Life policies offer the options of both a guaranteed death benefit and what is referred to as over-funding or the investing of contributions more than the premium in order to increase cash value.
Administration fees as deemed necessary by the insurance company are present in both IULs and Variable Annuities. Additional fees present in both policies include additional rider fees, investment-related fees, and annual policy fees. Further fees may incur if your investment company purchases the highest rated bonds in order to increase your margin of safety. Fees for investment trades may be applied in Variable Annuities. Administration fees determined by the chosen index plan may be applied in the purchase of Indexed Universal Life policies.
The U.S. Securities and Exchange Commission (SEC) decidedly classifies Variable Annuities as a form of security instrument rather than a life insurance product. The IUL is considered a life insurance product in spite of the minimal risk involved. While the active investor typically finds the Variable Annuity more enticing, those seeking less risk and less chance of loss desire the Indexed Universal Life policy.
The Opinions from Investment Professionals
Debate exists among investment professionals when it pertains to the opinions surrounding IULs and Variable Annuities, both being preferred. Individuals wishing to purchase an Indexed Universal Life policy or Variable Annuity should gather an adequate amount of opinions of investment professionals and consider their own personal needs. It is critical that in either scenario you understand fully the options available when choosing among the two products. Be sure to ask “what if..” questions in order to obtain a better perspective of how exactly the investment will return for you.