Why the argument never ends
Ask an annuity specialist and you’ll hear that indexed universal life is expensive and complicated. Ask an IUL specialist and you’ll hear that annuities are dead money with a tax problem. Each is describing the other product at its worst, and usually selling the one they carry.
The better starting point is a single question. Who is this money for? If it’s for you, to live on, you’re describing an annuity’s job. If it’s for the people after you, you’re describing life insurance’s job. If it’s both, the answer is usually some of each.
What an annuity is built to do
An annuity turns savings into income. An immediate annuity starts paying now. A deferred annuity with an income benefit starts later. Either way, the insurer takes on the risk that you live to 95.
- Most annuities don’t require medical underwriting, so health isn’t a barrier.
- Growth is tax-deferred, and fixed and fixed indexed contracts don’t lose value when markets fall.
- For legacy, the weak spot is taxes. Gains left in an annuity at death are generally taxable as ordinary income to your heirs.
What an IUL is built to do
Indexed universal life is life insurance first. Its core promise is a death benefit, generally paid to your beneficiaries free of federal income tax. The cash value grows based on an index, with a floor, and you can borrow against it during retirement.
- It requires underwriting. Your health and age set the cost, and some people won’t qualify on good terms.
- It takes years of funding to build meaningful cash value, and the insurance charges are real.
- Retirement income from policy loans isn’t guaranteed. If loans grow faster than the policy can support, the policy can lapse and trigger a tax bill. Designing and monitoring against that is the whole job.
Our guide to reading an IUL illustration shows how to check a design before you sign.
When the answer is both
Many retirees want a paycheck they can’t outlive and something meaningful left for their family. A common design splits the jobs. Guaranteed annuity income covers the essentials. Part of that income, or part of the required distributions you’d take anyway, pays the premium on a life insurance policy that carries the legacy. Your income is protected, and your heirs receive a death benefit that’s generally income-tax-free instead of a taxable annuity balance.
The lines can blur in the other direction too. For a 59-year-old mother planning for her disabled adult son, Cole Whitaker designed a legacy annuity that targets a $1,000,000 enhanced death benefit over fifteen years, paid in five annual installments into a special needs trust. The trustee uses each installment to buy lifetime income for her son. The design models his trust income growing from $14,000 to $73,000 a year after the fifth installment. It’s an annuity doing legacy work, because that family’s legacy is an income.
Three questions that decide it
- Who is this money for? You, your heirs, or both, and in what proportion.
- What happens if you live to 95? If that scenario worries you, some guaranteed income belongs in the plan.
- Can you qualify, and can you fund it for years? An IUL that’s underfunded or bought late in life rarely does what its illustration shows.
Answer those honestly and the product usually picks itself. For how annuities compare with each other, read SPIA, MYGA or FIA.
General educational information. Your circumstances, applicable requirements and specific contract terms belong in an individual review with the appropriate professionals.
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