September 30, 2022
Indexed Universal Life vs. Fixed Indexed Annuity
In this episode of Berry’s Bites, Chris Berry answers the question: What are the pros and cons of IUL vs FIA?
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Episode Transcript:
What are the pros and cons of IUL vs FIA? Fixed index annuities versus index universal life and understand these are tools. I don’t like to get into tools too much before we talk about goals and strategies but these are two tools that are becoming more and more popular, especially with the way markets are performing.
Probably the big thing with both of these is the fact that they’re indexed so an advantage for both of these is that they’re indexed and what that means is if the market goes down you stay where you’re at if the market goes up you collect the upside of the market and typically it happens on a yearly basis both of these make a nice little bond alternative.
So it’s a good bond alternative we’re getting safety and growth and you’re protecting against market volatility so both of these protect against market volatility and you can still get a good amount of growth, potentially. We have a growth kind of fixed index annuity you’re typically looking at six to eight percent on average. But it could be anywhere from zero to twenty percent rate of return in any specific year index universal life is going to be more just on average between that six to eight percent and that’s what you would see every year depending on how the markets are doing disadvantages of both of these to a certain extent are liquidity.
So this isn’t something where you’d want to move money in and then move money out it has to be part of a plan disadvantage of fixed index annuities I think they’re oversold by annuity salesmen so there’s some people that aren’t attorneys they aren’t investment advisors they don’t owe you a fiduciary duty all they do is they sell annuities. I don’t think annuities are inherently bad i just think that there’s a lot of bad people that oversell them both of these can be used by true fiduciaries as part of a holistic plan or they could just be sold to you by someone who all they do is they sell these and they just have to make sure it’s suitable for you the big thing with the IUL is that this can give you tax-free income all that growth is tax-free and typically the way it’s done is pulling money through tax-free loans where it doesn’t show up on the tax return whatsoever it’s almost like a Roth alternative plus it can be owned by the trust unlike a Roth cannot be owned by a trust another advantage with the IUL you can get a death benefit that also doubles as a long-term care benefit depending on your situation.
The downside of IUL can be more complicated you have to go through underwriting so you have to be a healthy advantage with the fixed index annuity simpler also you can access the income sooner especially with like drawdown fixed index annuities let’s say you put in 500 000 you could take out 50 000 a year without any fees or anything like that versus IUL typically you want to wait at least 10 years before you start pulling the income just because you want this to grow inside of this tax-free bucket and then just the big thing with IUL is just like what are you trying to accomplish.
The IUL can accomplish a couple of different things it can be tax-free income could be death benefits could be long-term care those would be situations where you’d want to look for the IUL do you want tax-free income in retirement do you want long-term care benefits. Do you want a death benefit fixed index annuity typically this is hey you have these investments and you want safety and growth or you want income and those are the two types of fixed index annuities that typically we see we see safety and growth where we protect your principal you put in 500 000 you’re not losing that the market goes up. You collect the upside or do we want to create an income stream somehow typically we’re doing a drawdown strategy where if you put in 500 000 you pull out 50 000 a year and then whatever growth is just gravy on that so it makes a nice bridge to social security that’s just some of the pros and cons of index universal life and fixed index annuities.