Important Disclosure: This material is life insurance advertising and is intended for educational and informational purposes only. It does not provide investment, tax, legal, or financial advice, and it is not a recommendation to purchase, replace, or modify any financial product, retirement plan, or investment strategy. Indexed universal life insurance (IUL) is a life insurance policy, not a retirement plan or securities investment. References to 401(k) plans are included solely for general comparison and educational context. Features, benefits, costs, and tax treatment of any life insurance policy depend on policy terms, individual circumstances, and applicable law. Consumers should consult their own licensed insurance professional and qualified tax or financial advisor before making any financial or insurance decisions.
IUL vs. 401(k): Compare Strategies to See What May Fit Your Goals
- What’s the difference between indexed universal life insurance (IUL) and a 401(k)?
- What is indexed universal life (IUL) insurance?
- What is a 401(k)?
- How an IUL insurance policy elevates your retirement savings
- Add IUL insurance to your portfolio with Amplify
Key Takeaways
- The biggest difference between an IUL and a 401(k) is that an IUL is an insurance policy that allows for cash growth, while a 401(k) is an employer-sponsored retirement account.
- 401(k)s and IULs both offer tax advantages and can help you save for retirement, but 401(k)s are tied to your employers and have strict rules about how and when you can use them.
- IULs may offer more flexibility than 401(k)s in certain situations, including the ability to access policy values earlier through loans or withdrawals, which may be tax-advantaged depending on policy performance and structure.
- IULs have lower growth potential than investments but also typically include downside protection features (for example, a 0% floor) that limit exposure to index losses, subject to policy terms, charges, and crediting methods.
Retirement is a reward for a life dedicated to the people who need you, but many people worry they won’t have enough saved to live the way they want. You may need multiple strategies in your retirement plan to ensure that you can fully enjoy the time you worked so hard for.
That’s where indexed universal life insurance (IUL) and a 401(k) come in, though each tool is designed to help people achieve different goals.
When it comes to an IUL vs. a 401(k), they’re different vehicles with different purposes, fees, and levels of risk. But they can both play a role in long-term financial planning.
In this article, we’ll go over each vehicle, its differences, pros and cons, and how it can contribute to a stable retirement.
Indexed Universal Life | 401(k) |
|---|---|
Life insurance with a death benefit and a cash growth potential. | Employer-sponsored retirement account. |
Not directly invested; includes features designed to limit index-related losses, subject to policy charges and terms. | Directly invested in the stock market with potential for losses. |
Premium payments are after taxes. | Contributions are before taxes. |
Tax-deferred growth. | Tax-deferred growth. |
Sample average annual return: 5%-8% (returns vary based on market conditions, policy design, fees, and index choices; past performance is not indicative of future results) | Sample average annual return: 5%-8% (returns vary based on market conditions, policy design, fees, and index choices; past performance is not indicative of future results) |
Policyholders may be able to take loans against available cash value, which may b e tax-advantaged if hte policy remains in force. | Penalties for withdrawing funds before you retire. May be able to take a loan against your cash value, subject to IRS rules and the specific terms of your employer’s 401(k) plan. |
What’s the difference between indexed universal life insurance (IUL) and a 401(k)?
An IUL is an insurance policy with a cash portion, and a 401(k) is an investment account. IULs combine a death benefit with cash value that earns interest based on index performance formulas that may resemble long-term market trends, subject to caps and policy limits.
Both accounts are tax-deferred, but IULs may have fewer restrictions on when and how you can access your money.
- Indexed Universal Life (IUL) insurance lets you specify a portion of your premium that will go towards cash value, and it gains interest based on the performance of a stock market index. The money isn’t directly invested, and losses and returns are both capped. This is designed to provide more growth potential than traditional savings accounts, while limiting downside risk.
- A 401(k) is a tax-advantaged investment account for retirement. Your money is invested in the stock market, with the potential for both uncapped growth and loss. Your contributions are pre-tax, which means that anything you contribute reduces your taxable income for the year.
A max-funded IUL vs. a 401(k) may have similar average annual return percentages, depending on the selected IUL index and the 401(k) investment allocations. The difference is that while 401(k)s technically have more growth potential, IULs’ growth is capped but is also designed to reduce exposure to market losses, subject to policy terms and charges.
On average, their performance may be similar, but IULs may be more resilient to market changes. This means that the money you need is more protected, and you’re less likely to be caught out by a market crash.
Feature | IUL | 401(k) |
|---|---|---|
Primary purpose | Life insurance with a cash value component | Retirement savings account |
Employer match | N/A | Some employers offer a matching contribution |
Tax on contributions | Yes | Traditional 401(k) account contributions are not taxed Roth 401(k) contributions are taxed |
Tax on growth | Tax-deferred growth and death benefit | No capital gains tax and tax-deferred growth |
Tax on retirement access | Loans and withdrawals may be tax-advantaged if properly structured | Traditional 401(k) accounts are taxed on eligible withdrawals Eligible Roth 401(k) withdrawals are not taxed |
Required minimum distributions (RMDs) | No RMDs | RMDs once you reach 73 years old. |
Fees | Insurance premiums and other policy fees | Service and administration fees for investment management |
Complexity | Can be highly complex to manage the payments and ensure that the policy remains tax-advantaged | Simple to apply for and managed by an investment company |
Death benefit | Direct death benefit, plus the cash component, is transferred to a beneficiary | No direct death benefit, but your 401(k) is transferred to a beneficiary |
Growth level | Capped growth with higher potential than traditional savings accounts | Uncapped growth with higher potential than IULs |
Risk level | Capped gains and losses, so there is limited exposure to stock market losses, mostly through fees, caps, and crediting methods | Your account can lose value if the stock market has a significant downturn |
What is indexed universal life (IUL) insurance?
IUL life insurance is a type of permanent life insurance policy that combines a death benefit with a cash value that can grow over time. You can borrow against the cash value to support your goals or deal with emergencies.
Pros | Cons |
|---|---|
Coverage for life: IULs are permanent policies. You don’t have to worry about re-applying at a certain age. | High cost: Payments can be more expensive than other types of life insurance due to the additional complexities. |
Flexible premiums: Policyholders may be able to choose the amount they wish to contribute on a monthly basis. | Increasing cost of insurance: Because it’s a permanent policy, the premiums can increase as you age. |
Potential returns: A cash value component that may earn interest based on stock market index performance. | Plan complexity: Index crediting strategies add a layer of complexity to plans, which can make the contracts more confusing. |
Downside protection: Index-related losses are typically capped at 0%, though policy charges still apply. | Not suitable for short-term savings: Drawing cash early may be impossible and can incur high charges if policy has to be surrendered. |
Cash value: May be able to access the cash component during your life to help reach your life goals and support your family. | Capped growth: Because your money is protected against index-related losses, it’s also capped in growth potential. |
Borrow against your investments: You may be able to take policy loans that can be tax-advantaged if structured properly and if the policy remains in force. | Tax-deferred growth: Your growth is not subject to capital gains tax, and death benefits are tax-free. |
How do indexed universal life policies build wealth over time?
Indexed universal life policies build wealth by tying a cash value portion of the account to stock market indexes. While the money is not directly invested, the interest you earn is based on the index performance.
An IUL account offers growth potential linked to stock market index performance, subject to caps and participation rates.
What is a 401(k)?
A 401(k) is a retirement investment account offered by employers. It has high growth potential because your money is directly invested in the stock market. Contributions are pre-tax, which means that putting money toward a 401(k) reduces your taxable income. Many employers offer matching contributions as an employee benefit.
Your money is managed by an investment company and put into diverse funds, indexes, or stocks with specific long-term return targets. There is a potential for a 401(k) to lose money, but they’re often diversified, which may help reduce volatility.
There are significant penalties for withdrawing money from a 401(k) before you retire, so they’re not intended to be used for pre-retirement financial goals. While you can sometimes take a loan out against your 401(k), this can become complicated if you change employers. Here are the pros and cons of 401(k) accounts:
Pros | Cons |
|---|---|
Employer perks: Employers often match a percentage of your contributions. | Contribution limits: You can only contribute so much to a 401(k) in a year. |
High long-term growth: Because they’re directly invested in the stock market, 401(k) accounts have high return potential. | Early withdrawal penalty: If you use your account balance before you retire, you pay an additional penalty tax, plus fees. |
Pre-tax contributions: You don’t pay tax on money that you contribute. | Potential volatility: If the stock market suffers, then your account can lose value. |
Tax-deferred growth: You don’t pay capital gains tax on activity inside a 401(k) account. When you retire, withdrawals are taxed as income, not capital gains. | Dependent on your employer: If you change jobs, you need to transfer your account to keep contributing to it. You may need to pay off any loans you took on the account quickly. |
Dependent on your employer: If you change jobs, you need to transfer your account to keep contributing to it. You may need to pay off any loans you took on the account quickly. | Limited choices: 401(k) plans are limited by what your employer offers, and you have little control over what happens in your account. |
Automatic contributions: Money is deducted from your paycheck automatically, so you don’t have to remember to pay into them. | Taxes during retirement: Because it’s tax-deferred, you’ll pay income tax on your 401(k) during retirement. This tax has the potential to be higher than you would pay on contributions if your account has a lot of growth. |
How an IUL insurance policy elevates your retirement savings
Both 401(k) accounts and IUL insurance accounts can help you build secure wealth.
If you’re a high earner and max out your 401(k) contributions, an IUL may be a complementary option for some individuals. The life policy combines:
- Death planning
- Retirement planning
- Policy values that may be accessed prior to retirement, subject to policy terms and potential tax considerations
If you’re worried about what may happen when standard term life insurance expires, then IULs offer advantages there, too. They’re permanent policies, so you won’t have to shop for insurance again at the end of a 20- or 30-year term.
Because IULs are tax-deferred, you won’t pay capital gains tax on your interest. You also may be able to take tax-advantaged loans, subject to policy terms and conditions, which you might prefer compared to taking a loan on your 401(k), because the loan repayment terms won’t be dependent on your employer.
Add IUL insurance to your portfolio with Amplify
If you’re considering an IUL vs. 401(k), the answer could be both. They’re both tax-deferred, which is an advantage for families looking to increase their retirement savings contributions. Plus, 401(k) plans are taxed when you withdraw them. IULs may offer access to policy values earlier in life through loans or withdrawals, which may be tax-advantaged depending on policy performance and structure.
IUL policies, in addition to giving you a death benefit, help you build long-term value with features designed to reduce market volatility. They aren’t just about insuring against death, they’re about preparing to live life fully.
Take the quiz and get an indexed universal life insurance estimate to discover a policy that’s right for your goals.
Frequently Asked Questions
Is an IUL policy better than a 401(k)?
Is an IUL policy better than a 401(k)?
Is an IUL good for retirement?
Is an IUL good for retirement?
What is the downside of an IUL?
What is the downside of an IUL?
How much do I need in my 401(k) to get $1,000 a month?
How much do I need in my 401(k) to get $1,000 a month?
Note
Disclosures
This article is provided for general informational and educational purposes only and is intended as life insurance advertising. It is not intended to provide, and should not be relied upon as, financial, investment, tax, or legal advice.
Indexed universal life insurance (IUL) is a life insurance policy with optional cash value features and is not a retirement plan, securities product, or investment account. Policy benefits, features, charges, and guarantees (if any) are subject to the terms and conditions of the policy and the financial strength of the issuing insurance company.
Any discussion of taxes is general in nature. Tax treatment varies based on individual circumstances, policy design, and applicable law, and may change over time. Loans and withdrawals may reduce policy values and death benefits and may result in taxable income if the policy lapses or is surrendered.
Comparisons to 401(k) plans or other financial products are for general educational purposes only and do not imply that any product is superior, interchangeable, or appropriate for every individual. Consumers should consult with a licensed insurance professional and a qualified tax or financial advisor regarding their specific situation before making any insurance or financial decisions.
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