Variable Annuity Vs. Indexed Universal Life

Variable annuities and indexed universal life both help retirement savings, but differently.

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Variable annuities and indexed universal life are both life insurance company products with some similarities and a few significant differences. If these were your options, in lieu of or in addition to an IRA, the differences in potential death benefit levels, the ability to take tax-free loans, contribution flexibility and potential risk factors are more important than their similarities. High-income individuals and professionals typically perceive that indexed universal life products offer more flexibility than variable annuities.


Both products help you build up a retirement fund. Both options also come with upside and downside risks. Variable annuities and indexed universal life policies may enjoy higher earnings than fixed-rate retirement options, such as traditional bank IRAs. However, depending on the performance of their investments, you also risk losing earnings over time. Variable annuities involve investing your contributions into mutual funds, while equity-indexed universal life earns you interest based on increases of a stock market index. Should your mutual fund or index decline, both choices will deliver you reduced earnings, thereby decreasing your retirement fund.

Major Difference

Variable annuity contributions are invested in mutual funds. Your insurance company makes those investments per your wishes. The underlying securities are composed of stocks and bonds. An indexed universal life policy pays you interest as a result of increases in a stock market index, such as the S&P 500. If you convert a variable annuity to monthly income payments, you can request guaranteed lifetime payments. You can contribute as much as you like, without IRS maximums, in indexed universal life policies and take money as tax-free loans when you need it for business or retirement purposes.

Death Benefit

Both products offer a death benefit that goes down as you withdraw or borrow funds from your account. A variable annuity often guarantees a minimum death benefit equal to the amount you contribute to it, which may or may not be a sufficient benefit. You may have to add a death benefit rider to a variable annuity policy. Indexed universal life insurance offers options of a guaranteed death benefit and "over-funding," paying premiums higher than the cost of coverage, which increases cash value.


Both products have insurance company administration fees. These vary from company to company, but typically include an annual policy fee, fees for any riders you add, and investment-related fees. Variable annuities can incur fees for investment trades. Indexed universal life products may incur administration fees depending on the index plan you choose. You also might incur fees if your company buys some highly rated bonds, to increase your safety factor, in addition to your index investment amount.


Because the risk of loss rests with the contract owner, the Securities and Exchange Commission classifies variable annuities as security instruments, not life insurance products. Indexed universal life, although it comes with some risk, is still considered an insurance product. Variable annuities are more appealing to active investors, while indexed universal life insurance is more attractive to those desiring less risk and lower probability of losses.