Two products that get sold badly and explained worse. Here's how each one actually works, what it costs you, and how to tell whether it fits — including the parts most people skip.
A ten minute read. No jargon without a translation.
Before the differences, the thing they share. An insurance company takes on some of your market risk. In exchange, they keep some of your market gain. That's it — everything else is detail.
Drag the index year. Watch what gets credited to an account with a 9% cap and a 0% floor.
A hypothetical example using one made-up cap, to show how the arithmetic works. Real caps, floors, participation rates and spreads vary by product and carrier, change over time, and are set by the insurance company. This is not a projection and not a product.
An annuity is a contract with an insurance company. You hand over money; they agree to pay it back on terms you choose. The reason people buy them is simple: it's the only product that can pay you for as long as you live, however long that turns out to be.
A set interest rate for a set term. The simplest version — closest to a CD, but from an insurer rather than a bank, and taxed differently.
Interest tied to a market index, with a floor under losses and a cap on gains. This is the type most of the conversation on this site is about.
You hand over a lump sum and income starts almost straight away, usually for life. Simple, and largely irreversible.
Invested directly in market subaccounts, with no floor. These are securities and require different licensing. We don't sell them — but you should know they exist, because they're often what people mean when they say annuities lost them money.
Money goes in and grows — that's accumulation. Later you turn on income, and the contract starts paying. The gap between those two phases matters: waiting longer usually means a bigger monthly cheque.
An optional add-on guaranteeing a certain income for life, even if the account value runs down. It has a cost, usually charged annually against the account. Whether it's worth it depends entirely on whether you'll actually use it.
IUL is life insurance first. It pays a death benefit when you die, and while you're alive it builds cash value credited against an index — with the same floor-and-cap arrangement as an indexed annuity. The two jobs are why it gets complicated.
It covers people who depend on your income, and the death benefit generally passes to beneficiaries income-tax-free. Cash value grows tax-deferred, and can often be accessed through policy loans. For someone who needs permanent life insurance anyway, the tax treatment is the appeal.
It's sold as an investment. It isn't one. Cost of insurance rises as you age and is deducted from cash value, so a policy that's underfunded, or funded on optimistic assumptions, can struggle in later years — exactly when you'd want it working.
Do you need life insurance? If the honest answer is no — nobody depends on your income, there's no estate issue, no business to protect — then the cash value features probably aren't reason enough on their own. Ask that first, before anyone shows you an illustration.
They're mentioned together constantly, which is unhelpful, because they solve different problems.
| Fixed Indexed Annuity | Indexed Universal Life | |
|---|---|---|
| Main job | Income you can't outlive | A death benefit for people who depend on you |
| Typically for | At or near retirement | Longer horizon, dependants, estate or business needs |
| You put in | Usually a lump sum | Premiums over years |
| Health matters? | No medical underwriting | Yes — you must qualify |
| Ongoing cost | Often none explicit; rider fees if added | Cost of insurance, rising with age |
| Getting money out | Penalty-free band, then surrender charges | Withdrawals and policy loans, which reduce the death benefit |
| When you die | Remaining value to beneficiaries, depending on the option chosen | Death benefit to beneficiaries, generally income-tax-free |
General characteristics only. Features vary significantly by product, carrier and state. Tax treatment depends on your circumstances — talk to a tax professional about your own situation.
If someone uses one of these without explaining it, ask them to.
Including us. A good answer is specific and in writing. A vague one tells you something.
If the last two get an uncomfortable answer, that's the most useful information you'll get all meeting.
The whole of this page, plus the questions worth asking whoever is selling you one, as a four-page PDF you can read later or hand to your spouse. No cost, and no obligation to talk to anybody.
Bring them. A first conversation is for working out whether any of this applies to you — and if it doesn't, we'll say so.
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