When an IUL might be a sensible alternative to an FIA

Discussions with clients who want to jump into the weeds about indexed universal life insurance and annuities are a lot of fun.

These clients are in close touch with their future. First, they likely have not turned over their financial strategy planning and management reins to a financial advisor. And second and most fun, they are open to creative approaches that get them to retirement with plenty of money and a rock-solid plan for their loved ones.

So, what is better: an indexed universal life insurance policy or a fixed indexed annuity (FIA)?

This article gets into the key differences with three typical client financial situations. It’s critical as agents you come prepared for tough questions. Let’s break them down from the client’s perspective.

There is a lot to like about IULs

An IUL policy offers a death benefit and a cash value component. The cash value can grow based on the market performance of a stock market index, such as the S&P 500, without being directly invested in the market. Additionally, IUL policies offer flexible premium payments and death benefit amounts, making them attractive for clients seeking both security and potential growth for their financial future.

Also, there are significant tax advantages. The policy’s cash value grows tax-deferred, and policyholders can access funds through tax-free withdrawals or loans. So it’s no surprise that IULs are appealing for long-term financial planning, especially when used correctly.

Annuities balance the need for security and growth

Annuity products are designed to provide a guaranteed income stream, which is most often used for retirement planning. But not always. There are three main types of annuities:

• Fixed annuities offer stable, guaranteed returns.
• Variable annuities provide market-driven growth potential (but also risk).
• Fixed indexed annuities strike a balance between security and upside potential.

Annuities also help protect against market downturns, ensuring policyholders don't outlive their savings. Many annuities also offer tax-deferred growth, allowing for increased wealth accumulation before distributions begin.

Like anything else, there isn’t a one-size-fits-all recommendation.

Annuity vs IUL: Both products fit complex client needs

We chose three client scenarios to demonstrate the differences between IULs and annuities. I would be curious if you have run across situations like these and what you did.

Scenario 1: Professional with orphaned 401(k) seeking growth with flexibility

Steve is a 50-year-old professional with an old 401(k). Also, he’s maxing out his 401(k) contributions with his current employer. He wants an additional tax-advantaged vehicle for growth. While he doesn’t need immediate income, he wants the flexibility to access funds if necessary before retirement.

• Why IUL? Steve values the market-linked growth potential with downside protection. An IUL allows tax-deferred cash value accumulation while offering liquidity through tax-free policy loans. Plus, he gains life insurance protection and flexibility without forced withdrawals or annuitization.
• Why not annuity? Although an indexed annuity also offers market-linked growth without risking the principal, it lacks the liquidity Steve desires. With surrender charges and limited withdrawal options, some annuity products might restrict access to his funds before retirement.

Scenario 2: Young professional planning for retirement

Sarah is a 30-year-old with a stable career and long-term financial goals. She’s a planner, but not a big risk taker. Sarah wants to build her retirement savings while also providing financial security for her family.

• Why IUL? Sarah values flexibility and potential growth. An IUL provides her with life insurance protection while also allowing her cash value to grow over time. She can tap into that cash value for future needs. The tax-free growth potential without direct market exposure suits her lower to moderate risk tolerance.
• Why not annuity? Sarah’s current focus is on growth and flexibility rather than securing a fixed income stream. She has time to take advantage of the compound growth in an IUL. Also, she doesn’t have a substantial lump sum to justify rolling into an annuity product at this stage of her career.

Scenario 3: Middle-aged individual focused on wealth preservation

James, a 50-year-old with significant savings, wants to preserve his wealth and minimize tax exposure while planning for retirement and investing in short-term real estate. He doesn’t consider himself a high risk-taker.

• Why IUL? James benefits from the tax-deferred growth and the ability to use the policy’s cash value growth as a supplemental retirement income source. The death benefit also ensures a legacy for his heirs, which aligns with his estate planning goals for his beneficiaries. He can also see the path for borrowing from his IUL policy to allow him to maximize his real estate transactions.
• Why not annuity? An annuity might lock up his funds in a less flexible structure. While it provides guaranteed income, James would likely want more control over his funds.

To sum up, it is incumbent upon you to dig into a client’s situation to understand their needs.

The flexible nature of an IUL combined with the life insurance component make it a product that can fit a broad range of needs. If you bring this kind of thinking to the table, clients will quickly conclude you are a trusted advisor.

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Drew Gurley is a licensed life insurance expert with nearly 15 years of experience. During his career as both a licensed life insurance agent and industry executive he has helped thousands of clients with their life insurance needs through his work at Redbird Advisors and Senior Market Advisors.