CPS Special Risk Services

Maxed Out Your 401(k)? How High Earners Use Indexed Universal Life

Tim Fuller — Tue, 06 Oct 2026 14:00:00 +0000

Once a high earner has maxed out their 401(k) and earns too much to contribute directly to a Roth IRA, a well-funded indexed universal life (IUL) policy is one more place to save with tax advantages. There are no IRS income limits on who can buy one, growth is tax-deferred, and money can be reached tax-free through policy loans when the policy is designed and kept in force correctly.

Key takeaways

In 2026 the 401(k) employee limit is $24,500, and direct Roth IRA contributions phase out between $153,000 and $168,000 (single) or $242,000 and $252,000 (married filing jointly).
IUL premiums are limited by life insurance tax rules (the MEC limits), not by your income.
Money comes out through withdrawals up to what you paid in, then policy loans.
It is life insurance first: there are policy costs, and it works best over 15 years or more.

The gap high earners run into

For 2026 the IRS lets employees defer $24,500 into a 401(k), 403(b) or most 457 plans, plus catch-up contributions if they are 50 or older. Direct Roth IRA contributions phase out between $153,000 and $168,000 of modified adjusted gross income for single filers and between $242,000 and $252,000 for married couples filing jointly.

Above those levels, the remaining options are a backdoor Roth IRA, a taxable brokerage account, a deferred compensation plan if the employer offers one, or cash value life insurance. Each has a place. IUL appeals to people who also need life insurance and want tax-free income later.

How IUL fills the gap

An IUL policy builds cash value that is credited interest based on a market index, with a floor that keeps credited interest from going below zero and a cap or participation rate on the upside. The cash value grows tax-deferred.

How much you can put in is set by the tax code’s life insurance rules (sections 7702 and 7702A), which tie premiums to the death benefit. There is no income test. A policy funded too quickly becomes a modified endowment contract (MEC), which makes loans and withdrawals taxable first, so accumulation designs are built to stay just under that line.

For many high earners the question is not whether to save more. It is where the next saved dollar will be taxed least.

How the money comes out

Withdrawals up to your basis (the premiums you paid) are generally not taxable.
Policy loans after that are generally not taxable while the policy stays in force and is not a MEC.
The death benefit passes to beneficiaries generally free of income tax.

The catch is that loans accrue interest and reduce the death benefit. If a policy lapses with a large loan outstanding, the gain can become taxable all at once. Income plans need to leave enough value in the policy to keep it in force for life.

What it costs, and who it is not for

IUL has cost of insurance, policy charges and surrender charges in the early years. A taxable brokerage account has no insurance costs, so IUL only makes sense when the tax benefits and the death benefit are worth those charges to you. It is usually not a fit for money you may need within 10 to 15 years, for anyone who cannot fund it consistently, or for someone looking only for investment returns.

Designing it well

Accumulation IUL is usually designed with the smallest death benefit the tax rules allow for the planned premiums, an increasing death benefit option while you are funding it, and a switch to a level death benefit before income begins. Ask to see illustrations at more than one crediting rate, including a conservative one.

Frequently asked questions

Is IUL a replacement for a Roth IRA?

Do Policy Loans Count Toward IRMAA or Social Security Taxes?

Tim Fuller — Mon, 05 Oct 2026 14:00:00 +0000

Generally, no. Loans from a life insurance policy that is not a modified endowment contract and stays in force are not taxable income. That means they do not count in the modified adjusted gross income Medicare uses for IRMAA surcharges, or in the combined income that decides how much of your Social Security is taxed.

Key takeaways

For 2026, IRMAA surcharges on Medicare Part B and Part D begin above $109,000 of MAGI for individuals and $218,000 for joint filers.
Up to 85% of Social Security benefits can be taxed once combined income passes $34,000 (single) or $44,000 (joint).
Policy loans do not show up in either calculation; 401(k) and IRA withdrawals do.
The policy must stay in force: a lapse with a loan outstanding can create taxable income.

How IRMAA works

Medicare’s income-related monthly adjustment amount (IRMAA) adds a surcharge to Part B and Part D premiums for people with higher income. For 2026 the standard Part B premium is $202.90 a month, and surcharges start when modified adjusted gross income is above $109,000 for individuals or $218,000 for married couples filing jointly. Medicare uses your tax return from two years earlier, so 2024 income sets 2026 premiums.

Because the brackets are cliffs, one extra dollar of income can raise premiums for the whole year. A large IRA withdrawal, a Roth conversion or a capital gain can push someone over.

How Social Security is taxed

The IRS looks at your combined income: adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits. For single filers, up to 50% of benefits can be taxed above $25,000 and up to 85% above $34,000. For joint filers, the levels are $32,000 and $44,000. These thresholds are not indexed for inflation, so more retirees cross them every year.

Every dollar of retirement income is taxed somewhere. The planning question is which bucket it comes from, and in which year.

Where policy loans fit

A policy loan is a loan against your cash value, not income, so it is not reported on your tax return. Used alongside retirement account withdrawals, it lets a retiree take the income they need while keeping reported income under an IRMAA bracket or a Social Security threshold.

Withdrawals up to your basis (premiums paid) are also generally not taxable.
Roth IRA qualified distributions are tax-free too; cash value is another source alongside them.
Traditional IRA and 401(k) withdrawals, pensions and most annuity income are taxable and count toward both calculations.

The catches

Policy loans accrue interest, and they reduce the death benefit. If a policy lapses or is surrendered with a loan outstanding, the gain above your basis becomes taxable in that year, which could cause the very IRMAA and tax problem you were avoiding. Income from a policy needs to be planned so the policy stays in force for life.

This also only works if the policy was funded years earlier. It is a strategy to set up in your 40s and 50s, not the year you retire.

Frequently asked questions

Are life insurance withdrawals taxable?

Life Insurance vs. a 529 Plan: Saving for a Child Who May Not Go to College

Tim Fuller — Fri, 02 Oct 2026 14:00:00 +0000

For most families, a 529 plan is the most efficient way to save for college. Cash value life insurance appeals to parents who want flexibility if their child chooses a trade, starts a business or skips college, and who also want the plan protected if a parent dies. Many families use both.

Key takeaways

529 earnings are tax-free when spent on qualified education; earnings used for other purposes are taxed and usually hit with a 10% additional tax.
Cash value life insurance can be used for anything, through withdrawals and policy loans, with no education requirement.
Cash value is generally not reported as an asset on the FAFSA.
Life insurance needs years of consistent funding before the cash value is meaningful.

Where a 529 plan shines

A 529 plan is purpose-built for education. Growth is tax-deferred, withdrawals for qualified education expenses are tax-free, and many states give a state income tax deduction for contributions. Under SECURE 2.0, a 529 that has been open at least 15 years can also roll up to $35,000, over the beneficiary’s lifetime, into a Roth IRA for that beneficiary, subject to annual Roth limits.

The trade-off is the restriction. Earnings withdrawn for non-qualified expenses are subject to income tax and, in most cases, a 10% additional tax. That additional tax is waived up to the amount of a tax-free scholarship, but the income tax still applies.

Where cash value life insurance fits

A permanent policy, such as indexed universal life or whole life, builds cash value that can be reached through withdrawals and policy loans for any purpose. If your child becomes an electrician, a business owner or a missionary instead of a college student, the money is still usable without a penalty.

There are two common designs. A policy on a parent protects the plan: if the parent dies, the death benefit can fund the goal. A policy on the child builds a very long runway and gives the child lifelong coverage, and it is often started by grandparents.

The question is not which account is better. It is how sure you are that the money will be spent on college.

Side by side

	529 plan	Cash value life insurance
Best for	Money you are confident will pay for education	Money that may be used for education or something else
Tax on growth	Tax-deferred; tax-free for qualified education	Tax-deferred; tax-free access through loans and withdrawals to basis if designed and kept in force correctly
Non-education use	Earnings taxed plus, usually, a 10% additional tax	No penalty; loans reduce the death benefit
FAFSA	Parent-owned 529 is reported as a parent asset	Generally not reported
Death benefit	None	Yes
Early-year costs	Low	Higher; surrender charges in early years

The honest trade-offs

Life insurance has costs a 529 does not: cost of insurance, policy charges and surrender charges in the early years. That means cash value grows slowly at first and needs roughly 10 to 15 years or more to work well. If college is only a few years away, a 529 or a savings account is usually the better tool.

Loans and withdrawals also reduce the death benefit, and a policy that lapses with a loan outstanding can create a tax bill. The policy needs to be designed and monitored with the goal in mind.

Using both

Many families put their base college savings in a 529, then add a cash value policy for flexibility and protection. That way the education dollars get the best tax treatment, and the family still has money that can go anywhere life leads. See how SRS approaches college funding.

Frequently asked questions

Is cash value life insurance counted on the FAFSA?

Why Grandparents Buy Life Insurance for Their Grandchildren

Tim Fuller — Thu, 01 Oct 2026 14:00:00 +0000

Grandparents buy permanent life insurance on a grandchild to give a gift that keeps growing for decades: coverage the child keeps for life, plus cash value that can later help with college, a first home or a business. The grandparent owns and pays for the policy, so they stay in control until they decide to hand it over.

Key takeaways

The grandparent is usually the owner and payor; a parent or guardian normally signs the application for a minor.
Starting young means low insurance costs and many decades for cash value to grow.
The grandchild keeps coverage for life, no matter what happens to their health later.
Handing the policy to the grandchild later counts as a gift, so plan the timing with a tax advisor.

What grandparents are really buying

Most grandparents who ask about this are not worried about a death benefit on a child. They want to leave something meaningful that outlasts them, and they would rather not hand an 18-year-old a check. A permanent policy lets them do both: it builds value slowly and quietly, and it arrives with guardrails.

A head start. Cash value that can grow for 20, 30 or 50 years before anyone needs it.
Lifelong insurability. Coverage that stays in place even if the grandchild later develops diabetes, heart disease or another condition that makes insurance expensive or unavailable.
A legacy with a story. Many grandparents hand the policy over at a milestone, such as graduation, a wedding or age 30, along with a letter about why they started it.

How the policy is set up

Three roles matter. The owner controls the policy and pays the premiums; this is usually the grandparent. The insured is the grandchild. The beneficiary, who receives the death benefit, is often a parent while the child is young.

Name a successor owner too, usually a parent. If the grandparent dies before handing the policy over, the successor owner takes control and the policy keeps going instead of ending up in the grandparent’s estate paperwork.

When the grandchild is ready, ownership can be transferred to them. That transfer is a gift. In 2026 the IRS annual gift tax exclusion is $19,000 per recipient, and the value of a transferred policy is generally measured by its value at the time of transfer, not the premiums paid. A tax advisor can help time it.

The most valuable part of the gift may be insurability: coverage locked in before the grandchild has any health history at all.

Whole life or indexed universal life?

Whole life has guaranteed cash value growth and fixed premiums. It suits grandparents who want predictability and a set payment schedule.

Indexed universal life (IUL) credits interest based on a market index, with a floor that keeps credited interest from going below zero, and it allows flexible premiums. It suits grandparents who want more growth potential and are comfortable with non-guaranteed crediting. Policy charges apply to both designs, so either one needs to be funded as planned.

What the money can do later

Once the grandchild owns the policy, they can use the cash value through withdrawals and policy loans for anything: tuition, a down payment, starting a business, or leaving it alone to keep growing. Unlike a 529 plan, there is no penalty if the money is not spent on education.

Cash value life insurance is also generally not reported as an asset on the FAFSA. Some private colleges that use the CSS Profile ask about it, so check with the schools on the list.

Limits and things to watch

Coverage limits. Carriers cap how much insurance a child can have, often based on how much coverage the parents carry.
Early years. Surrender charges and policy costs are highest in the first 10 to 15 years, so this works best as a long-term gift.
Funding. Paying in too much too fast can turn the policy into a modified endowment contract (MEC), which changes how withdrawals and loans are taxed. The policy should be designed to stay under those limits.
Consent. Rules on who can insure a child vary by state and carrier.

Frequently asked questions

Do the parents need to agree?

Death Tax Savings For The Uninsurable – A Small Balm In Gilead

Tim Fuller — Tue, 14 Mar 2023 14:56:12 +0000

When the first generation of a high-net-worth family can’t qualify for life insurance, the usual estate-tax funding playbook stalls. Here’s the structure advisors use to keep the plan moving anyway.

Key takeaways

When the first generation is uninsurable, insurance on the second generation — funded via generational split-dollar — can keep the estate tax plan alive.
The first generation lends premium dollars to a trust owning policies on the second generation; the loan is repaid only when the second-generation insureds die.
Because repayment is decades away, the loan avoids using lifetime gift-tax exemption and can qualify for a valuation discount in the first generation’s estate.

Generational split-dollar lets a family fund estate-tax liquidity through the second generation when the first generation can’t qualify for coverage at any price.

The problem when the first generation is uninsurable

Estate tax planning for wealthy families usually follows two steps: reduce the anticipated tax bill with every workable strategy, then insure against what’s left with life insurance on the first-generation client, typically a grandparent. That plan breaks down when the grandparent turns out to be a medical decline and can’t get coverage at any price.

Shifting the insurance to the next generation

Most tax and legal advisors point to the same fallback: insure the second generation instead, so there’s liquidity to cover estate tax when the second generation’s wealth eventually passes to the third. The structure that makes this work is often called generational split-dollar.

How the loan structure works

The first generation lends the premium dollars to the owner of the policies on the second generation, usually an irrevocable trust whose beneficiaries are generations two and three. The note is repayable only when the second-generation insureds die, often decades away. That timing matters for two reasons: the loan doesn’t require using any of the first generation’s lifetime gift-tax exemption to cover premiums, and when the note’s value later lands in the first generation’s estate, it can qualify for a meaningful valuation discount since repayment is so far out.

What the Levine case confirmed

Generational split-dollar drew scrutiny for years after some unfavorable rulings. That changed with the Tax Court’s decision in Levine v. Commissioner, which upheld a $2,300,000 valuation on a $6,500,000 note, saving the estate over $1,500,000 in estate taxes, and gave attorneys a workable blueprint for drafting these arrangements.

How to use this with clients

This is a fit for families where the first generation is uninsurable and there’s still a meaningful anticipated estate tax bill at the second generation’s death. Underwriting the second generation is more involved, since it requires showing the carrier a credible path to the anticipated inheritance, but it’s often the only way to keep the estate-tax funding plan alive once the first generation can’t qualify.

If you have a client whose estate plan depends on insurance the first generation can no longer qualify for, that’s a case we can help you work through.

Frequently asked questions

What is generational split-dollar?

Your Clients Aren’t Average – Why Is Their Long-Term Care?

Tim Fuller — Thu, 23 Feb 2023 16:21:17 +0000

Some long-term care carriers price coverage around the “average” claim — a few years, then done. The real claims data tells a very different story, and if a client’s coverage is built around an average, that’s exactly the plan that fails the client whose care need runs long.

Key takeaways

The commonly cited “average” LTC claim length (3.7 years women, 2.2 years men) hides the real risk: the longest, most expensive claims.
Largest-claim data from seven carriers shows multi-million-dollar, decade-plus claims for both men and women.
Clients whose coverage is built around an average are exactly the clients a long claim will bankrupt.

In five of the seven carriers tracked, the largest male LTC claim ran as long as, or longer than, the largest female claim — even though pricing assumptions favor women needing more care.

The problem with planning around “average”

The commonly cited average length of an LTC need is 3.7 years for women and 2.2 years for men. That statistic often gets used to justify shorter, cheaper benefit periods, on the logic that most people won’t need care much longer than that.

An average describes the middle of a range, not the edges — and the edges are where long-term care claims get expensive.

What the largest claims on record actually look like

The American Association for Long-Term Care Insurance tracks the largest LTC claims paid by carrier. Looking at the largest claims paid through December 2018 across seven leading carriers tells a very different story than the averages suggest. In five of those seven cases, the largest male claim ran as long as, or longer than, the largest female claim — even though the “average” narrative assumes women need care longer:

Carrier 1: 14 years, 2 months (male), $2,276,381 — vs. 16 years, 6 months (female), $2,329,333
Carrier 2: 19 years, 3 months (male), $2,205,800 — vs. 15 years, 4 months (female), $2,636,417
Carrier 3: 16 years, 2 months (male), $2,091,083 — vs. 9 years, 10 months (female), $1,727,594
Carrier 4: 15 years, 8 months (male), $1,700,000 — vs. 14 years, 6 months (female), $2,000,000
Carrier 5: 14 years, 3 months (male), $1,461,256 — vs. 11 years, 7 months (female), $2,012,385
Carrier 6: 15 years, 4 months (male), $1,413,934 — vs. 15 years, 6 months (female), $1,499,601
Carrier 7: 13 years, 2 months (male), $1,179,502 — vs. 18 years, 1 month (female), $1,316,417

Source: American Association for Long-Term Care Insurance, largest claims paid through December 2018.

Every one of those claims topped $1 million. Several ran past 15 years. None of them would have been fully covered by a policy built around a two-to-four-year average.

Why the outliers matter more than the average

Conditions like Alzheimer’s and Parkinson’s don’t follow a predictable timeline. A client diagnosed in their early 60s can need care for well over a decade. Planning around the average length of a claim ignores exactly the cases that do the most financial damage — the ones that go long.

That’s the case for looking past the shortest, cheapest benefit periods and considering options like a Continuation of Benefits rider or a lifetime benefit period — particularly for clients with a family history of cognitive decline, or clients who would rather pay more now than risk running out of coverage later.

Frequently asked questions

Is the average length of an LTC claim a good number to plan around?

Permanent Total Disability Coverage for MLB Player

Tim Fuller — Wed, 11 Jan 2023 18:10:11 +0000

A five-year, $105 million contract was on the table — and the biggest risk to it wasn’t a pitcher’s fastball, it was the chance the player never got to sign it. Here’s how we structured permanent total disability coverage to protect a Major League free agent through the riskiest year of his career.

Key takeaways

A five-year, $105 million contract was at risk the moment a career-ending injury could happen before it was signed.
Permanent total disability coverage pays a lump sum for a career-ending event, unlike standard monthly-benefit DI.
The policy was sized against the player’s projected earnings, not his current salary.

We placed a $25 million permanent total disability policy — structured to pay a lump sum — for roughly $250,000 in premium, protecting a $105 million contract before it was even signed.

The situation

The client was an outfielder and designated hitter entering the final year of his current contract, heading into free agency, and projected to sign a five-year deal worth roughly $105 million. His advisor came to us with a clear problem: standard disability coverage wasn’t built for exposure like this. One career-ending injury or illness before that new contract was signed could cost the player, and his family, a life-changing amount of money.

Why permanent total disability was the right tool

For a high-income athlete, the exposure isn’t just “can’t work for a few months” — it’s “career over, permanently.” That calls for permanent total disability coverage designed to pay a lump sum, not a monthly benefit. We worked directly with the player’s agent and financial advisor to size a policy against his actual earnings trajectory, not just his current salary.

The solution

We placed a $25 million permanent total disability policy, structured to pay out as a lump sum, at a premium of roughly $250,000 plus taxes and fees. The policy protected the player against exactly the risk that mattered most: a career-ending injury or illness before his next contract was secured.

The result

The advisor, the agent, and the player all got what they needed: a comprehensive policy that let the player focus on the game, not on the what-ifs. He went on to sign his contract with that protection already in place.

If you’re working with a high-income earner ($500k+ annually) who’s an all-star in their own field — an athlete, executive, physician, or business owner — it’s very likely they carry exceptional income exposure that a standard policy won’t cover. That’s a case we can help you design.

Frequently asked questions

What is permanent total disability coverage?

Vaping – Underwriting Non-Combustible Tobacco Use

Tim Fuller — Sat, 07 Jan 2023 00:31:52 +0000

Vaping doesn’t have to mean tobacco rates for your client. If they use only non-combustible products, one of our carriers offers a path to non-tobacco pricing — here’s how it works.

Key takeaways

Vaping-only clients have historically been rated at full smoker rates, regardless of the lower health-risk profile.
One carrier partner offers non-tobacco pricing for vaping-only use once a carrier-ordered biomarker test comes back negative for combustion.
Qualifying requires no cigarette or cigar use in the past 10 years, in addition to the clean biomarker result.

Clients who vape but don’t use combustible tobacco can move from Preferred Tobacco to Standard Non-Tobacco rates — a full rate-class downgrade in cost — if a biomarker test confirms no tobacco combustion.

What counts as non-combustible tobacco

Non-combustible tobacco products don’t require burning tobacco to use. Vaping (e-cigarettes) is the most common example — the device heats liquid at a lower temperature to create an inhalable aerosol, rather than burning tobacco leaf. Underwriters have historically rated vaping the same as combustible tobacco: at smoker rates, regardless of the lower health-risk profile.

The program that changes the math

One of our carrier partners offers a special underwriting program that allows non-tobacco rates for vaping-only use, provided a biomarker lab test ordered by the carrier comes back negative for tobacco combustion. If your client qualifies, the rate class can improve by a full downgrade — for example, from Preferred Tobacco to Standard Non-Tobacco.

How to qualify

Tobacco use must be non-combustible only: nicotine delivery devices (vaping), chewing tobacco, or snuff
No use of cigarettes or cigars in the past 10 years
A tobacco combustion biomarker ordered by the carrier must come back negative

If you have a client who vapes and doesn’t smoke combustible products, it’s worth checking whether they qualify before you quote them at smoker rates by default. Contact our underwriting team and we’ll walk the case through this program with you.

Frequently asked questions

Does vaping always get rated as tobacco use?

Helping Clients Understand the Complexities of Income Protection

Tim Fuller — Wed, 04 Jan 2023 20:35:29 +0000

A client’s income is often their single biggest asset — bigger than their home, their portfolio, even their business. Most advisors make sure everything else is insured. Here’s how to make sure income itself doesn’t go unprotected.

Key takeaways

Most clients assume employer group LTD is enough protection — it usually isn’t, especially for higher earners.
Individual Disability Insurance (IDI) is sized to total income, travels with the client, and layers on top of group coverage.
The moment a client’s income and career risk peak is often the same moment employer-tied coverage disappears.

Group long-term disability often replaces only 40-60% of income, excludes bonuses and incentive pay, and disappears the moment a client changes jobs.

The gap in group long-term disability coverage

Many employers offer group long-term disability (LTD) coverage, and many clients assume that’s enough. It usually isn’t. Group LTD is typically taxable, often only replaces 40-60% of income, and frequently excludes bonuses and incentive pay entirely — even though those can make up a large share of a client’s total compensation.

For higher-income earners, the gap is even wider. Group LTD benefits are often capped at a flat dollar amount that falls well short of what’s needed to replace a real monthly income. And because the coverage is tied to the employer, it typically disappears the moment a client changes jobs — at exactly the point in their career when their income, and their exposure, is highest.

What Individual Disability Insurance actually covers

Individual Disability Insurance (IDI) is built to close that gap. Just as life insurance pays a beneficiary for a loss, IDI pays a monthly benefit — tailored to a policyowner’s total income, not just their base salary — if a serious illness or injury keeps them from working. It travels with the client, not the employer, and it can be layered on top of group LTD to cover the income group coverage leaves out.

Why now is the right moment to raise it

Clients are more open than ever to conversations about protecting their income and their families against the unexpected. That makes this a natural moment for advisors to introduce IDI, not as an abstract product, but as a direct answer to a concern clients are already thinking about.

How to talk to clients about it

The clearest way to make the case is to point out that expenses don’t pause just because income does. Mortgages, car payments, loans, and everyday costs keep coming due whether or not a client can work — and a disabling illness or injury often adds new expenses on top of the old ones. IDI protects the income clients are already using to cover those costs, maintain their lifestyle, and support their families.

By raising income protection proactively, advisors don’t just fill a coverage gap — they demonstrate the kind of comprehensive planning that keeps clients loyal for the long run. If you have a client relying solely on group LTD, or a high earner whose real income exposure has never been fully addressed, that’s a case we can help you design.

Frequently asked questions

What is Individual Disability Insurance (IDI)?

Tax-Deferred vs. Taxable: How to Explain an Annuity’s Real Yield to Clients

Tim Fuller — Mon, 14 Nov 2022 18:28:22 +0000

A fixed annuity quoting a “guaranteed” rate can look unremarkable next to a taxable alternative advertising a higher number — until you run the tax math. Here’s a simple way to show clients what a tax-deferred guarantee is actually worth.

Key takeaways

Clients anchor on the headline rate, not the after-tax outcome — that’s where taxable alternatives look falsely competitive.
On a $100,000 deposit, the tax-deferred annuity compounds to roughly $116,758 by year three at 5.30%.
Tying the comparison to a client’s actual tax bracket and time horizon makes the tax-equivalent yield conversation most persuasive.

A 5.30% tax-deferred annuity guarantee is equivalent to an 8.15% return on a fully taxable investment at a 35% tax bracket.

The comparison clients don’t usually see

Say a client is deciding between a tax-deferred fixed annuity guaranteeing 5.30% for three years, and a taxable investment. Assuming a 35% tax bracket, that 5.30% tax-deferred guarantee is equivalent to an 8.15% return on a fully taxable investment. Most clients — and plenty of advisors — never see that comparison laid out side by side.

Running the numbers

On a $100,000 deposit, the tax-deferred annuity at 5.30% grows to roughly $105,300 in year one, $110,881 by year two, and $116,758 by year three. A taxable account would need to earn 8.15% just to keep pace after taxes — and that’s before accounting for the annual tax drag on a taxable account, which compounds the disadvantage year over year.

Why this comparison matters for the conversation

Clients tend to anchor on the headline rate, not the after-tax outcome. When a taxable option quotes a higher number, it’s easy for a client to assume it’s the better deal. Showing the tax-equivalent yield reframes the conversation around what actually lands in the client’s pocket, not just the rate on paper.

How to use this with clients

This kind of side-by-side math is most persuasive when it’s tied to a client’s actual tax bracket and time horizon, since both change the tax-equivalent yield. It’s also a natural opening to talk about how tax deferral compounds over multiyear guarantee periods, and where a fixed annuity might fit alongside other retirement and legacy planning tools.

If you have a client comparing a fixed annuity to a taxable alternative and want help running the actual numbers for their bracket and time horizon, that’s a conversation we can help you have.

Frequently asked questions

What is tax-equivalent yield?