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 ShoenthalEditor & Licensed Life Insurance ExpertRebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.&Katherine MurbachEditor & Licensed Life Insurance AgentKatherine Murbach is an editor and a former licensed life insurance agent at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

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Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate SEO Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
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Maria FilindrasMaria FilindrasFinancial AdvisorMaria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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Saving for retirement typically involves a 401(k) plan through your employer, or an individual retirement account (IRA). You can also use a permanent life insurance policy with cash value, like whole life insurance, to build retirement savings.

Using a life insurance policy as an investment tool isn’t the best primary choice for retirement savings because it’s expensive and comes with more risk.

But if you’ve already maximized annual contributions to traditional retirement accounts and have income to spare, permanent life insurance may be a good supplemental option for you. 

Key takeaways

  • Generally speaking, when saving for retirement you have a choice between using tax-deferred and after-tax 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 are funded with after-tax dollars and 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. It’s one of the simplest ways to save for retirement.

IRAs are ideal for those without employer-sponsored plans, such as 401(k)s, but they can also 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.

A LIRP might make sense if you already have an IRA and have been consistently reaching your annual contribution limit.

Tax benefits

With a Roth IRA, you don’t pay taxes on withdrawals after age 59 ½ and cash gains are tax-deferred.

With a LIRP, you’d only pay taxes if you made a withdrawal from your policy that’s higher than your cost basis, in which case you’d pay taxes on the gains.

The difference between Roth IRAs and traditional IRAs is the tax structure. Traditional IRAs are taxed upon withdrawals, since they were funded with pre-tax dollars.

Roth IRAs are funded with after-tax dollars, so the entire account becomes tax-free when you reach retirement, as long as you make a qualified distribution (which means that the account is at least five years old and the account owner is at least age 59 ½). 

One of the main tax benefits of whole life insurance, or any other type of permanent life insurance with cash value, is that the cash value grows tax-deferred.

Every time you pay a premium, part goes toward maintaining the policy, and the rest goes toward the cash value, which functions as a tax-advantaged savings vehicle. You can eventually withdraw from or borrow against your cash value, though it takes years to accumulate.

IRA vs. 401(k)

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 vs. traditional 401(k)s vs. Roth IRAs

Policy details

LIRP (cash value life insurance)

Traditional 401(k)

Roth IRA

Contribution limits

Varies by insurer

$22,500 (+$7,500 if older than 50)

$6,500 ($7,500 if older than 50)

How you contribute

Premiums (after-tax dollars)

Pre-tax income

After-tax dollars with no tax deductions

How your money grows

Tax-deferred

Tax-deferred

Tax-free

(Penalty-free) withdrawal qualifications

In most cases, none*

59½ years old and up

59½ years old and up and an account at least five years old

Withdrawal taxes

Only if your withdrawal exceeds cash value base amount

Taxed as regular income

No income taxes

Required minimum distributions

Varies by policy premiums

73 years old and up

None

Income tax

Yes

Yes

No

Collapse table

*A LIRP that has been overfunded, or exceeded federal tax law limits, will become a modified endowment contract (MEC), at which point you’ll pay taxes on withdrawals unless you’re 59 ½ years old and up, and your account is at least 15 years old.

How can permanent life insurance 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) and 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.

These features cost more, but can be used as you age to pay for a nursing home or other medical costs related to long-term care. 

Should you use life insurance as an investment?

If you maximize contributions to 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. It’s much more straightforward than permanent life insurance, which can come with costly policy surrender charges, high premiums, and savings that aren’t guaranteed. 

A Roth IRA also offers flexibility — if you fully fund it one year, but the next year you face unexpected financial hardship, you can choose not to fund it, and your existing contributions will still gain interest.

With a permanent life insurance policy, you must keep paying premiums, which are often several hundred dollars per month, or you risk your policy lapsing.

If you’re unsure if cash value life insurance fits into your financial goals and plans for retirement, speaking with a financial planner or Policygenius advisor can help.

More about life insurance and financial planning

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 isn’t 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 toward 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.

Authors

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Katherine Murbach is an editor and a former licensed life insurance agent at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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