IUL vs. Annuity for Expats: Key Differences Explained

To assist you in selecting the financial product that best suits your retirement needs, this IUL vs. annuity comparison examines the key differences between the two solutions from an expat perspective and offers general guidance on the circumstances in which each may be more appropriate.

What Is Indexed Universal Life (IUL) Insurance?

Indexed universal life (IUL) insurance is a permanent life insurance policy that combines a death benefit with a cash value component tied to a stock market index (e.g., the S&P 500 Index in the US). In alignment with other universal life insurance options, IUL provides lifelong coverage alongside flexible premiums and adjustable death benefit payouts.

Indexed universal life insurance is primarily a US-based insurance structure. For UK residents and many non-US expats, availability may be limited, and regulatory treatment and tax outcomes can differ significantly.

In the UK, such policies are commonly classified as non-qualifying for tax purposes and may be subject to the chargeable events regime.

However, IUL differs from other universal life insurance products in the way the cash value grows. The credited interest is linked to a selected stock market index, although you do not directly invest in the market.

Instead, the interest credited reflects increases in the relevant equity index and is typically subject to constraints set by the insurer, such as caps, participation rates, or spreads.

Most IUL policies apply a minimum crediting floor (often 0%) to index-linked interest, which may prevent negative index returns being credited in a given period; however, the policy’s cash value can still decline due to insurance charges, administrative costs, and loan interest, particularly during prolonged low-return environments.

The most notable advantage of IUL is its combination of life protection and tax-deferred growth, with reduced direct exposure to market volatility compared to traditional equity investments, but subject to insurer discretion, policy charges, and the risk of policy lapse if funding or withdrawals are not properly managed.

You may also borrow against the policy’s cash value, which can provide additional flexibility in retirement, subject to policy terms and ongoing costs.

These benefits are contrasted by the costs of an IUL policy, which may be significant and include:

• Administrative fees.
• Premium expense charges (deductions from each premium before allocation to cash value).
• Surrender charges.
• Optional rider charges.

What Is an Annuity?

An annuity is a contract with an insurance company that can provide guaranteed or variable income, either immediately or at a future date, in exchange for a lump sum or a series of contributions. Depending on the contract, income may be payable for life, for a fixed term, or subject to investment performance.

Once premiums are paid, the insurer invests the funds and, if and when the annuity is annuitised, pays income according to the contractual terms.

Annuities are particularly prevalent in the UK, where retirees commonly use defined contribution pension pots to purchase income guarantees. In the US, annuities are more commonly purchased to obtain a reliable income in addition to Social Security or employer-sponsored retirement plans such as 401(k)s.

An annuity is a flexible financial product that can assume various forms, including:

• Fixed annuities: Provide a guaranteed interest rate and predictable payments for life or for a fixed term.
• Fixed indexed annuities: Offer interest credited by reference to a market index, subject to insurer-imposed limits such as caps or participation rates.
• Variable annuities: Allow investments in sub-accounts (similar to mutual funds), with income and account value linked to market performance and subject to higher volatility and fees.

You may also customise annuities to accommodate different financial needs. For instance, you may utilise a single-life annuity to receive income until your death or elect a joint-life option so that your spouse continues to receive payments upon your passing.

Additional features, such as guaranteed periods or value-protection riders, may be available at additional cost.

Annuitising (converting an annuity into a payout stream) is typically an irrevocable decision: once income payments begin, you usually cannot access the committed capital in a lump sum, and in most cases it is not possible to borrow against it without materially reducing income or incurring significant charges.

What Are the Differences Between IUL and Annuities?

IUL and annuities differ in three crucial aspects:

1. Purpose and core advantages
2. Liquidity and flexibility
3. Tax treatment

Purpose and Core Advantages

An annuity’s fundamental purpose is to help manage the risk of outliving your retirement savings by converting a portion of assets into a predictable income stream, often for life.

Certain annuity types, such as fixed or guaranteed income annuities, can also provide income that is largely insulated from day-to-day market volatility.

By contrast, the defining feature of an IUL policy is the life insurance death benefit, which is designed to provide financial protection and liquidity for beneficiaries upon death.

In the event of your death, your dependants can receive the death benefit to meet various financial needs, such as:

• Settling outstanding debt.
• Replacing lost income.
• Helping beneficiaries maintain their standard of living.

IUL policies may also build cash value linked to an index-crediting formula, but returns are typically limited by policy charges and constraints set by the insurer, such as caps, participation rates, or spreads.

From this perspective, annuities are typically used to secure retirement income for the policyholder, whereas IUL is primarily intended for life protection and legacy planning.

While annuities can include survivor or guaranteed-period features, IUL policies may be more effective for passing wealth to beneficiaries in a tax-efficient manner in certain jurisdictions and structures, subject to local tax rules.

Liquidity and Flexibility

IUL is generally more flexible than an annuity in terms of contributions and withdrawals:

IUL policies also provide more flexibility to introduce modifications according to your financial objectives as the term progresses. They typically offer a selection of index options or fixed account options each year, enabling you to tailor the index crediting strategy.

Although variable annuities provide a certain degree of control (specifically through the alterations of the investment sub-accounts), the fundamental payout terms remain relatively unchanged.

A notable similarity between IUL and annuities relates to their termination. You may surrender both options and regain their cash value, often reduced by surrender charges (which may be considerable).

Pension annuities purchased in the UK generally cannot be cancelled or surrendered after the cooling-off period has elapsed, unlike income drawdown arrangements which retain investment and withdrawal flexibility.

Tax Treatment

Although both IUL and annuities enable tax-deferred growth, the tax treatment of payouts differs.

In the US, the taxable portions of annuity distributions are typically taxed as ordinary income. However, the specifics depend on whether the annuity is qualified or not:

In the UK, payments from annuities purchased with funds from a registered pension scheme are generally treated as pension income and taxed at your marginal rate. You may ordinarily take up to 25% of the benefits as tax-free cash, subject to the relevant allowances and any protections.

Conversely, IUL policies that are not classified as Modified Endowment Contracts (MECs) may allow US policyholders to withdraw amounts up to their total premiums paid (cost basis) without immediate income taxation. Policy loans may also be used instead of taxable withdrawals, subject to interest charges and lapse risk.

In the UK, many IUL policies are classified as non-qualifying and fall under the chargeable events regime. You may take withdrawals of up to 5% of the original premium per policy year on a cumulative tax-deferred basis; however, these withdrawals are not tax-free and may result in UK income tax when a chargeable event occurs, such as a policy surrender or maturity.

Taxation rules in both countries are complex and subject to change, and professional advice is strongly recommended to assess the most tax-efficient approach based on residency, product structure, and long-term objectives.

Our financial advisers at Titan Wealth International can provide personalised guidance to help structure retirement income and insurance solutions appropriately.

Product Availability and Regulatory Considerations for Expats

Access to indexed universal life insurance and annuities varies significantly depending on your country of residence, citizenship status, and the jurisdiction in which the product is issued and serviced.

Indexed universal life insurance policies are primarily issued by US insurers and are generally designed for US persons. They are regulated at the US state level, and ongoing policy servicing may be restricted if the policyholder becomes resident outside the United States.

For UK residents and many non-US expats, availability may be limited, and such policies are often classified as non-qualifying for UK tax purposes, which can result in less favourable tax treatment.

In addition, UK retail access to certain overseas insurance-based investment products may be constrained by local regulatory rules and disclosure requirements.

Annuities are also jurisdiction-specific products. Regulatory protections, guarantees, and tax outcomes depend on local insurance and pension law, and a product purchased in one country may not retain the same characteristics if you later relocate.

This is particularly relevant where annuities are purchased within pension wrappers, as portability and tax treatment may change following a move abroad.

Before purchasing either product, expats should confirm:

• Whether the product can be legally sold and ongoing servicing can be maintained in their country of residence.
• How it will be treated for local tax, reporting, and regulatory purposes.
• Whether future changes in residency could materially alter the expected outcomes or access to policy features.

Should You Purchase an IUL Policy or an Annuity?

To decide between IUL and an annuity as an expat, consider the following factors:

1. Existing insurance products
2. Investment horizon
3. Additional income sources
4. Estate planning preferences

Existing Insurance Products

If you are not utilising equivalent products that provide lifelong coverage and/or financial protection for beneficiaries, an IUL policy may be worth considering, subject to availability, suitability, and tax treatment in your country of residence.

If you already hold another type of universal life insurance or whole life insurance, an IUL policy may not be necessary unless you explicitly wish to incorporate index-linked crediting. In this case, an annuity may be an effective way to diversify retirement income by providing a predictable income stream, while other insurance products can be used for flexibility or estate planning.

Investment Horizon

An IUL policy may be more suitable if your primary objective is long-term planning and you are still several years from retirement. In general, IUL policies tend to be more effective when held over an extended period, as early policy charges and insurance costs can reduce net accumulation in the initial years.

Where retirement is approaching, the available time for an IUL policy to build meaningful cash value may be limited. In such cases, an annuity may be more appropriate, particularly if your priority is to secure reliable retirement income.

The primary benefit of annuity income is the conversion of capital into a predictable payment stream and protection against longevity risk, rather than growth linked to investment performance.

Additional Income Sources

IUL policies may be tax-efficient for certain US expats, depending on policy structure and funding levels.

By funding the policy during working years, a US policyholder may later withdraw amounts up to the cost basis without immediate income taxation and then use policy loans for additional income, subject to loan interest, policy charges, and lapse risk.

Although annuities can also be used to complement other income streams, they are generally less flexible once income payments begin. They may be more suitable for:

• UK tax residents and expats in jurisdictions without comparable life insurance tax allowances.
• Individuals who value a fixed, pension-like income alongside other variable income sources.
• Expats who already have sufficient exposure to financial markets and do not require additional market-linked growth.

If you plan to use an IUL policy to support retirement income, it is important to obtain professional financial or tax advice, as poorly managed withdrawals or loans can result in policy underperformance or lapse.

Estate Planning Preferences

Unless enhanced with features such as guaranteed periods, value-protection, or survivor benefits, many lifetime annuities cease on death and may leave little or no residual value for beneficiaries.

If your goal is to create a legacy or provide liquidity to beneficiaries, an IUL policy may be a more suitable option in certain circumstances. The death benefit can provide a readily available source of cash that may help equalise inheritances or reduce the need to liquidate illiquid assets at an unfavourable time.

However, it is important to assess the tax treatment of life insurance death benefits carefully. In the US, life insurance proceeds are typically excluded from income tax when paid on death, but they may be included in the taxable estate if the policy is owned by the insured. In the UK, death benefits from non-qualifying life insurance policies may form part of the estate for inheritance tax purposes unless ownership is structured appropriately, such as through a trust.

Who Should Not Consider IUL or Annuities

Neither indexed universal life insurance nor annuities are universally suitable solutions, particularly for expats with complex cross-border circumstances or evolving residency profiles.

You may wish to avoid or reconsider these products if:

• You require short-term liquidity or expect to access most of your capital within a few years.
• You are uncomfortable with long-term contractual commitments and product complexity.
• You are resident in a jurisdiction where the tax or regulatory treatment of foreign. insurance products is unclear or potentially unfavourable or subject to frequent change
• You are primarily seeking low-cost, transparent investment exposure rather than insurance-based solutions.
• You are unwilling or unable to monitor product performance, charges, and withdrawals over time, particularly where policy outcomes depend on active management.

For some expats, alternative strategies such as diversified investment portfolios, pension drawdown arrangements, or locally regulated retirement products may be more appropriate depending on individual objectives, risk tolerance, and tax residence.

Cross-Border Tax Considerations for Expats

If you hold an annuity or an IUL policy as an expat, the taxation of distributions is determined primarily by your tax residency status, although citizenship, source of income, and product structure may also be relevant. Assuming you have established residency overseas, your country of residence will typically apply its domestic rules to any income or gains arising from these products.

However, your home country and/or the country where the product was issued may also retain the right to impose tax on the same payments. The US, for instance, taxes its citizens on their worldwide income regardless of whether they have established tax residency elsewhere.

In addition, if you have purchased an annuity or an IUL policy in a third country, that jurisdiction may also impose tax on related distributions under its domestic legislation.

Meanwhile, the UK generally taxes non-UK residents on UK-source income, which may include certain UK pension and annuity payments depending on their nature and source, while non-pension insurance policies issued outside the UK are typically not treated as UK-source income.

As a result, you may be exposed to taxation in more than one jurisdiction on the same income stream.

Unlike many foreign collective investment vehicles, properly structured life insurance policies are generally not treated as passive foreign investment companies (PFICs) for US tax purposes, although classification depends on the specific policy features and ownership structure.

You may mitigate or eliminate double taxation if your country of residence has a double tax agreement (DTA) with your home country and/or the country where the product was issued.

DTAs allocate primary taxing rights between the contracting states for certain categories of income and typically outline mechanisms for claiming relief, such as exemptions and tax credits.

In practice, treaty relief often requires procedural steps, including documentation and claims, to reduce or remove withholding tax at source.

Because cross-border tax outcomes depend on product structure (for example, pension annuity versus non-pension annuity, and how an insurance policy is characterised), the existence and scope of a DTA, and your tax residency status, professional advice is strongly recommended before initiating withdrawals, annuitising, or restructuring.

Currency Risk and Payment Mismatch

For expats, currency exposure is a critical consideration when evaluating long-term insurance and retirement income products.

Annuity payments and indexed universal life policy values are typically denominated in the currency of issuance, commonly US dollars or pounds sterling. If your retirement spending occurs in a different currency, exchange rate movements may materially affect the real value of your income or withdrawals over time.

Currency risk is particularly relevant where:

• Income payments are fixed or guaranteed in nominal terms.
• Retirement is expected to span several decades.
• Living expenses are linked to a different currency than the policy.

While some insurers offer limited multi-currency features, these do not eliminate currency risk and may involve additional cost or complexity.

As a result, many expats manage currency exposure through broader financial planning rather than relying solely on product design.