Comparison Last reviewed: 2026-10-03 Part of Comparisons

IUL vs Annuity (and IUL vs Fixed Index Annuity)

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

Verdict: they do different jobs. An annuity is built for income you cannot outlive and protection from bad market timing; an indexed universal life (IUL) policy is life insurance whose cash value you can reach later. On taxes, with non-qualified money, the order of withdrawal is the big difference: annuity gains come out first and are taxed as ordinary income; a non-MEC life policy returns your basis first. At death, an annuity's gain is taxable to heirs, while a life policy's death benefit is generally income-tax-free.

Same index idea, different products

FIA vs IUL (general features)

	Fixed index annuity (FIA)	Indexed universal life (IUL)
Main job	Accumulation with a floor, then income	Death benefit plus cash value
Medical underwriting	None	Yes
Charges	Usually no annual charge on the base contract; surrender charges	Cost of insurance, loads and fees every month
Withdrawals (non-qualified)	Gain first, ordinary income; 10% additional tax before 59½	Basis first if not a MEC; loans not taxed while in force
At death	Heirs owe ordinary income tax on the gain (no step-up)	Death benefit generally income-tax-free

The tax order, worked

Put in $100,000 and let it grow to $200,000. A single filer in the 24% bracket, federal tax only, simplified (worked example, IRC 72):

Hypothetical $100,000 growing to $200,000 (federal, single, 24% bracket assumed flat)

What you do	Non-qualified deferred annuity	Non-MEC life policy (cash value $200,000)
Take out $100,000	All $100,000 is gain: taxed as ordinary income	Up to basis: $0 tax
Cash out everything	$24,000 tax on the $100,000 gain (+$10,000 if under 59½; +$3,800 NIIT above the threshold)	$24,000 tax on the gain, no 10% penalty
Hold until death	Beneficiary owes ordinary income tax on the $100,000 gain	Death benefit (not cash value) generally income-tax-free under IRC 101(a)

Hypothetical. Not an illustration of any specific policy. Not a quote. The life policy reaches $200,000 of cash value more slowly because cost of insurance and charges come out; this is not apples to apples on growth. California would add about $9,300 of state tax in each taxable case.

The life policy's advantage is real but conditional: policy loans and withdrawals up to your basis are generally not taxed if the policy is not a modified endowment contract (IRC §7702A) and stays in force; a lapse or surrender with a loan outstanding can create taxable income. The annuity's tax rules are in IRC 72; the life insurance basis-first rule is in IRC 72(e)(5)(C).

Where annuities win

Lifetime income that can't stop. A SPIA, or an income rider or annuitization, pays as long as you live, backed by the claims-paying ability of the issuing insurer.
Less sequence-of-returns risk. Guaranteed or floored principal (MYGA, FIA) and a guaranteed income floor mean a bad market year early in retirement doesn't force you to sell low (why the first bad years matter most).
Inside an IRA or 401(k), the tax comparison is a wash. Every withdrawal from qualified money is ordinary income whether it sits in an annuity or a brokerage-style investment, and IRA assets get no step-up either way. The tax trap applies only to non-qualified (after-tax) money.

Use annuities for what they're great at, income and protection, not as a tax-efficient growth account. See current MYGA rates, SPIA rates, or get a free annuity review.

Free comparison

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Inside an IRA, the comparison changes

All of the above applies to non-qualified (after-tax) money. Inside an IRA or 401(k), an annuity is taxed like any other IRA holding: every withdrawal is ordinary income. You cannot hold a life insurance policy inside an IRA. Annuity inside an IRA: what changes.

Hans's decision order

Need income you cannot outlive or protection from a bad first five years of retirement? That is an annuity's job (MYGA, SPIA or FIA).
Need a death benefit and want tax-advantaged cash value you can reach later, and you are young enough to fund it 15+ years? That is the IUL's job.
Over 60 and looking only for safe growth? Usually an annuity; an IUL's cost of insurance leaves too little time for cash value to build (why).

Current MYGA rates · The annuity tax trap · Variable annuity vs IUL vs FIA

Want both options priced for you?

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Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Is an IUL better than an annuity?

They do different jobs. Annuities provide income you cannot outlive and protection from sequence risk. An IUL provides a death benefit plus cash value you can reach later.

How are annuity withdrawals taxed?

From a non-qualified deferred annuity, gains come out first and are taxed as ordinary income, with a 10% additional tax before 59 and a half unless an exception applies.

How are IUL withdrawals taxed?

From a non-MEC policy, withdrawals up to your basis are generally not taxed, and loans are not taxed while the policy stays in force. A lapse with a loan can create taxable income.

Do annuities get a step-up at death?

No. The gain in a deferred annuity is income in respect of a decedent, taxable to the beneficiary as ordinary income.

What is the difference between an FIA and an IUL?

Both credit index-linked interest with a floor. An FIA is an annuity with no medical underwriting and is built for accumulation and income; an IUL is life insurance with monthly insurance charges.

Sources

Hans Goldstein, CA Insurance License #4273294 · NPN 20602398 · Goldstein & Co. LLC dba Goldstein Insurance Services, CA License #6016830

Contact: hans@hansgoldstein.com · 213-414-2808

General education, not tax or legal advice. Tax treatment depends on your facts and on current law, which can change. Talk to your CPA or estate attorney. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Guarantees apply only to the contractual terms of the policy. Caps, participation rates, loan rates, charges and dividends are not guaranteed and can change. Hans is paid a commission by the insurer if you buy a policy through him. For life insurance, ask and he will tell you what he earns on your specific policy. Product and company names are trademarks of their owners. Goldstein Insurance Services is an independent agency, not affiliated with or endorsed by any insurer named here. Life insurance requires underwriting; not everyone qualifies. This page describes products in general terms; read the policy and the insurer's disclosures before you buy.