401(k) vs. Indexed Universal Life (IUL)

Ultimately, the choice between investing in a 401(k) vs Indexed Universal life depends on your individual needs. For many Americans, employer-match is a good enough benefit to encourage them to stick with a 401(k) for retirement planning.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent Benji Carr

UPDATED: Apr 20, 2022

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Quick Facts

  • Indexed universal life insurance or IUL is a life insurance policy that offers a death benefit and savings features that can be altered.
  • A 401(k) is an employer-provided retirement plan with no monthly fees or premiums associated with it.
  • IULs can be very expensive, and sometimes only folks with higher incomes are able to afford this type of policy.

What is the difference between a 401(k) vs Indexed Life Insurance? While many of us are familiar with 401(k)s, indexed universal life insurance, or IUL, is another story.

While the two policies have many similarities, there are also vital differences that you should be aware of while planning for retirement.

IUL life insurance terms last the duration of your life and have fluid premiums. The death benefit and savings features could be altered. A 401(k) is a retirement policy usually provided by your workplace.

Read through our quick guide to explore the differences between a 401(k) and indexed universal life insurance to help you choose which of these investment tools is right for you.

If you’re ready to receive IUL or other life insurance quotes, simply enter your information into our FREE online tool above to receive quotes right now.

What are the differences between indexed universal life insurance and a 401(k)?

There are some major differences between indexed universal life insurance or IUL vs 401(k) that you should be aware of while planning for retirement. Putting in the research and consulting with a professional will help you decide which option best fits your needs. You should make sure you pay attention to fees that you could be subject to, investment strategies you can use to maximize your funds, and more. There are a variety of tools at your disposal, and you should make sure that you understand each one.

One major difference is that an IUL is an insurance policy provided by an insurance company, while a 401(k) is an investment product provided by your employer. Investment products help grow your net-worth and savings.

Insurance policies offer you protection against loss. While both can be used simultaneously, some financial experts recommend keeping them separate.

Universal life insurance policies come with a relatively high premium payment, similar to whole life insurance policies, which are also permanent.

In the table below, see what the average rates for a $100,000 whole-term life insurance policy will cost you monthly by age at the preferred rate from State Farm.

Whole Life Insurance Average Annual Monthly Rates by Age at the Preferred Rates
AgeAverage Monthly Preferred Life Insurance Rates
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Use these numbers as guidelines, as your actual rates for an IUL will be different. However, the data above gives you a good starting point for what whole-term life insurance policies actually cost.

Many other factors will influence your overall rates, like your age and medical background, and the actual details of your policy.

An IUL will provide you with investment gains as well as insurance. However, a 401(k) will provide you with similar gains usually at a lower price. This leads us to another difference, the price. IULs often come with very high premiums.

However, 401(k)s are often provided by your employer, and you choose the percentage of your paycheck you want to contribute. Sometimes, your employer will also contribute to your 401(k).

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What is indexed universal life insurance or IUL?

You might be wondering what indexed universal life insurance or IUL actually is. Universal life insurance is a life insurance policy that lasts for the duration of your life. There is no specified end to the policy term. IUL is a universal policy.

How much life insurance do you need? That depends on if you have children, what your savings look like, and if you have any pre-existing medical conditions that make you too high-risk to qualify.

If you have no dependents and your savings can cover your end of life expenses, a life insurance policy might not be necessary for you.

Life insurance policies are worth setting up if you want to create an inheritance and there are plenty of insurance agents that can help you determine what kind of coverage you need and help you find out what the cost of insurance would be for you.

The amount should equal your current salary plus any hidden expenses, like health insurance costs, for example, and an additional cushion for any unforeseen circumstances. Of course, that amount will vary depending on your income level.

According to the Insurance Information Institute, Social Security survivor’s benefits can also be a substantial end-of-life payout.

With an indexed life insurance policy, there will be a death benefit as well as a cash account that can be used for withdrawals, loans, or to pay policy premiums.

There is an indexed annuity associated with IULs. An annuity is essentially a contract between you and an insurance company in which the insurer makes payments to you, the insured. This could be either immediately or in the future.

An indexed annuity pays an interest rate based on a certain stock market index or portfolio.

Ultimately, an IUL provides you with an income-tax-free retirement income. This income is safe from unpredictable stock market risks. You can use an IUL calculator to help you estimate your future gains.

What are the pros and cons of indexed universal life insurance?

To help you make an informed decision about if an IUL policy is right for you, let’s discuss the index universal life insurance pros and cons.

IULs offer both life insurance coverage and investment gains, which is a plus. But, remember, the premiums will be much higher, so you should weigh the growth of your investments against the premium costs.

In fact, this type of insurance policy is often only feasible for a high-income earner and is used for tax benefits instead of the typical use of life insurance products. This is one of the biggest problems with indexed universal life insurance. The cost of insurance is about what many people can afford to pay.

Because an IUL is a financial product, it can be difficult to understand, which is another con. There are many options available, and pages and pages of fine print; this can easily overwhelm consumers. Relying on an insurance agent is helpful, however, it leaves you dependent on a third party.

Because IULs are already taxed, you can access the cash-value account part of your IUL pretty much at any time, so it can essentially act as a loan. This is considered to be a huge advantage for many consumers, the fact that there is no tax on withdrawals. Also, beneficiaries get a tax-free death benefit from an IUL, which is perhaps one of the biggest benefits of this type of policy.

It’s not a bad product, but this financial tool is not going to be suitable for everyone.

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What is a 401(k)?

A 401(k) is something most Americans have probably heard of. Usually, it is an employer-sponsored personal retirement plan with multiple investment options. It gets its name because it is defined in the 401(k) subsection of the Internal Revenue Code.

The payments for a 401(k) come directly from your paycheck, and often your employer will match the amount you invest up to a certain percentage. You can choose a beneficiary to receive your 401(k) savings amount in the event that you pass. The money will become a part of your taxable estate.

There are two types of 401(k) accounts, traditional and Roth. Any profits within both types of accounts are not taxed. Roth accounts are tax-exempt, which means contributions and withdrawals will not affect your income tax.

Traditional accounts are tax-deferred. This means contributions can be deducted from taxable income. However, withdrawals will be added to taxable income. There are limits to the contributions, as well as specific rules about withdrawals.

According to the IRS, for those over the age of 50, the 2020 contribution limit cannot exceed $57,000 and the 20201 limit cannot exceed $58,000, not counting catch-up contributions.

A benefit to a Roth 401(k) is that the profits are tax-free because the contributions are not made with pre-tax dollars. However, with a traditional account, your taxes are deferred.

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What are the pros and cons of a 401(k)?

To help you decide if a 401(k) plan is an effective retirement planning option for you, let’s discuss some pros and cons. Some specific details of a 401(k) can be confusing. However, the investment process is usually very straightforward and easy for most people to understand.

There is also no extra premium payment associated with a 401(k). Whatever percentage of your paycheck you choose to invest in it is all it will cost you.

There’s no earnings cap on a 401(k), which is also a positive thing and allows for plenty of growth. Another huge benefit of a 401(k) is that many employers match your contribution. However, a big con is that there’s no protection from loss, and it does depend on the market. If your stock market investments don’t perform well, you risk losing your savings because there is no protection against market crashes. Of course, if the market does well, there is a lot of growth potential.

Because 401(k)s are retirement investment vehicles, usually you have to reach a certain age before you can withdraw any money. When you turn a certain age specified in your 401(k) details, typically called your retirement age, you’ll have to take monthly required distributions.

If you do not follow these rules, you could face a substantial tax penalty, which some people may perceive as a negative.

Roth 401(k)s are a little more relaxed. However, you still must follow all IRS rules to avoid a tax penalty.

How do you choose between a 401(k) and indexed universal life insurance?

Ultimately, the choice between investing in a 401(k) vs life insurance depends on your individual needs. For many Americans, employer-match is a good enough benefit to encourage them to stick with a 401(k) for retirement planning.

Because 401(k)s are provided through an employer, there is no premium associated with it besides whatever you choose to contribute. This is another reason why many Americans choose this type of retirement plan.

IULs, on the other hand, come with a death benefit as well as the ability to make non-taxable withdrawals. However, there is a high premium associated with this type of life insurance policy. Many people cannot afford normal universal life insurance policies, let alone an indexed one. You may be better off looking into a different permanent life insurance product.

You are now an expert on the differences and similarities between 401(k)s and indexed universal life insurance. Refer back to this guide as much as needed while you shop around for your new life insurance policy.

If you’re ready to start comparing IUL and other life insurance policy rates, simply enter your ZIP code into our FREE quote tool below.


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