Life insurance vs. Roth IRA for retirement saving

Whole life insurance with a cash value component can offer similar tax advantages to a Roth IRA. But to get the biggest savings for retirement, an IRA or traditional retirement account is the best option.

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Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

Published July 14, 2021|4 min read

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Saving for retirement typically involves a 401(k) plan through your employer or an individual retirement account (IRA). But there are some reasons people look into alternatives – such as permanent life insurance with cash value – to build retirement savings.

Using life insurance as an investment tool isn’t the best primary choice for retirement savings because it can be costly to build cash value and maintain a policy. But if your employer doesn’t match contributions or if you’ve maxed out your annual contributions, permanent life insurance may be a good supplemental option for you. 

Learn when using life insurance as an investment makes sense and the important differences between Roth IRAs and life insurance to decide which retirement savings plan is the best choice.

Key Takeaways

  • You have a choice when saving for retirement between tax-deferred (qualified) and after-tax (non-qualified) plans 

  • 401(k)s and IRAs are subject to taxes when cash is distributed and penalties for early withdrawals

  • Whole life insurance and other cash value policies may offer tax advantages, but can be more expensive to maintain than traditional retirement accounts

Life insurance vs Roth IRA

Using life insurance to save for retirement is known as having a life insurance retirement plan (LIRP). This type of plan uses a permanent life insurance policy’s cash value component to help fund retirement. 

An IRA is a retirement savings plan that you open and fund on your own and one of the simplest ways to save for retirement. IRAs are ideal for those without employer-sponsored plans, such as 401(k)s, but can be used in addition to other retirement savings. 

Both LIRPs and IRAs are individually funded (with no involvement from your employer), so deciding between the two makes sense. But in most cases, an IRA is the best first choice between the two and a LIRP is the best choice if you already have an IRA and have reached your annual contribution limit.

Tax benefits of life insurance and IRAs

LIRPs have the same tax benefits as a Roth IRA, so you don’t pay taxes on withdrawals after age 59 ½ and cash gains are tax-deferred. The difference between Roth IRAs and traditional IRAs is the tax structure. Traditional IRAs are non-qualified, meaning you use pre-tax dollars to contribute and pay taxes upon withdrawal. Roth IRAs are qualified, meaning you use after-tax dollars to contribute and do not pay taxes on withdrawals after age 59 ½. 

Whole life insurance, or any other type of permanent life insurance with cash value, can help fund retirement. Term life insurance does not have cash value and cannot be used to save for retirement. 

IRA vs 401(k)

IRAs and 401(k)s are both great ways to save money for retirement. The main difference between an IRA and 401(k) is whether your employer is involved. An IRA is only available to individuals, similar to permanent life insurance, while 401(k)s are employer-sponsored and often offer some sort of employer matching. 

401(k)s allow higher yearly pre-tax contributions than IRAs, but have fewer investment options. 

See how life insurance compares with a 401(k) and Roth IRA below:

Tax comparison: LIRPs, traditional 401(k)s, and Roth IRAs

LIRP (cash value life insurance)Traditional 401(k)Roth IRA
Contribution limitsVaries by insurer$19,500 (+$6,500 if older than 50)$6,000 ($7,000 if older than 50)
How you contributePremiums (after-tax dollars)Pre-tax incomeAfter-tax dollars with no tax deductions
How your money growsTax-deferredTax-deferredTax-free
(Penalty-free) withdrawal qualifications59½ years old and up and an account at least 15 years-old59½ years old and up59½ years old and up and an account at least five years-old
Withdrawal taxesOnly if your withdrawal exceed cash value base amountTaxed as regular incomeNo income taxes
Required minimum distributionsVaries by policy premiums70½ years old and upNone
Capital gains taxYesYesNo

How permanent life insurance can be used for retirement

A cash value life insurance policy can supplement other retirement savings accounts, but we don’t recommend using life insurance as your main savings vehicle. However, if you’ve reached the contribution limits for your 401(k) or IRA, here’s how putting money into your permanent policy’s cash value can be beneficial: 

Pay extra premiums to fund your cash value

Overpaying your permanent policy’s premiums means the extra money paid goes into the cash value and grows tax-deferred. But there are some caveats: you’ll be penalized on withdrawals before age 59 ½ and if you exceed the annual premium limit (set by the IRS) your policy converts into a modified endowment contract (MEC) (which means extra taxes and penalties for withdrawals.)

Use the cash value to supplement retirement

As a cash value life insurance policy owner, you can access the cash value in addition to your retirement accounts, allowing you to spread out retirement spending across multiple accounts. For example, after a down year in the stock market, you can withdraw money from your policy’s cash value instead of drawing down from your IRA, which will replenish your IRA savings.

Long-term care support

Most life insurance policies allow for add-ons called riders, including a long-term care rider, which provides an accelerated death benefit. It can be used as you age to pay for a nursing home or other medical costs related to long-term care. 

Is life insurance as an investment worth it?

If you max out your retirement accounts such as a 401(k) or IRA each year and don’t want to put additional funds into a traditional post-tax investment account, then using permanent life insurance to save can be a good option. 

But if you’re trying to decide between opening an IRA (Roth or traditional) or opening a life insurance policy for the sole purpose of retirement savings, an IRA is almost always the better choice. 

A Roth IRA offers higher returns on your contributions than cash value accounts and is much more straightforward than permanent life insurance, which can come with costly policy surrender charges, high premiums, and savings that aren’t guaranteed. 

Frequently asked questions

Is life insurance a good retirement vehicle?

The best retirement vehicles are 401(k) accounts and IRAs. However, if you’ve reached the maximum contribution limits for these traditional accounts, permanent life insurance can be used to save for retirement.

Is it better to invest in a 401(k) or life insurance?

A 401(k) is offered through employers who often contribute toward the account to help your savings grow. For most people, a 401(k) is a better way to save for retirement. 

Is a Roth IRA life insurance?

No, a Roth IRA is not the same as life insurance. A Roth IRA is an individual retirement account that you contribute toward using after-tax dollars. The money in the account goes towards different investments and grows tax-free over time until you reach retirement age. Permanent life insurance’s primary purpose is to provide a tax-free sum of money to your loved ones when you die. Some policies come with a cash value component that can be used to supplement retirement income.

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