401(K) vs. Indexed Universal Life (IUL) Insurance: Which Is Better for You
Deciding between 401(k) vs. indexed universal life (IUL) insurance comes down to coverage and price. Monthly IUL rates start at $75, so employer-match 401(k) is a good enough benefit for many retirement portfolios.
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Benjamin Carr
Former State Farm Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs. Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times...
Former State Farm Insurance Agent
UPDATED: May 17, 2023
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Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
UPDATED: May 17, 2023
It’s all about you. We want to help you make the right life insurance coverage choices.
Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- Indexed universal life insurance (IUL) is a life insurance policy that offers adjustable death benefits and savings features
- A 401(k) is an employer-provided retirement plan with no monthly fees or premiums associated with it
- IUL insurance rates are higher than average, starting at $75 per month for policyholders in their 30s
What is the difference between 401(k) vs. indexed universal life (IUL) insurance? While many of us are familiar with 401(k)s, indexed universal life insurance 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 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.
There are some major differences between indexed universal life insurance and 401(k) plans 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.
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. An IUL will provide you with life insurance dividends as well as a death benefit. 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, similar to whole life insurance policies, which are also permanent. To learn about the difference between the two, visit our guide to whole vs. universal life insurance.
On the other hand, a 401(k) is 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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Indexed Universal Life Insurance Defined
Indexed universal life insurance is a permanent life insurance policy that provides investment opportunities in a specific stock market index. There is no specified end to the policy term, as coverage lasts for the duration of your life.
With an indexed life insurance policy, there will be a death benefit and a cash account that can be used for withdrawals, loans, or to pay policy premiums.
There is also 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. An indexed annuity pays an interest rate based on a certain stock market index or portfolio, and the payout could be either immediately or in the future.
Ultimately, an IUL provides you with an income-tax-free retirement income. This income is safe from unpredictable stock market risks. You can learn more in our universal life insurance guide.
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.
- You can access the cash-value account part of your IUL pretty much at any time.
- There is no tax on IUL withdrawals.
- Beneficiaries get a tax-free death benefit from an IUL.
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 above 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 that can easily overwhelm consumers. Relying on an insurance agent is helpful. However, it leaves you dependent on a third party.
It’s not a bad product, but this financial tool is not going to be suitable for everyone.
401(k) Explained
A 401(k) is something most Americans have. Usually, it is an employer-sponsored personal retirement plan with multiple investment options and 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:
- Traditional accounts are tax-deferred. This means contributions can be deducted from taxable income.
- Roth 401(k) profits are tax-free. Contributions are not made with pre-tax dollars.
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. However, withdrawals from traditional 401(k)s will be added to taxable income. There are also limits to the contributions, as well as specific rules about withdrawals.
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.
A major benefit is that no extra premium payment is associated with a 401(k). Whatever percentage of your paycheck you choose to invest in is all it will cost you.
There’s also no earnings cap, 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 loss protection, and it depends on the market. For example, 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, you usually have to reach a certain age, typically called your retirement age, before you can withdraw any money, and 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.
The Cost Difference Between 401(K) Vs. Indexed Universal Life Insurance
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.
Age | Average Monthly Preferred Life Insurance Rates |
---|---|
25-years-old | $89.31 |
30-years-old | $102.53 |
35-years-old | $120.59 |
40-years-old | $143.03 |
45-years-old | $173.48 |
50-years-old | $213.28 |
55-years-old | $269.01 |
60-years-old | $355.44 |
65-years-old | $474.85 |
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.
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How to Choose Between a 401(k) and Indexed Universal Life Insurance
Because 401(k)s are provided through an employer, there is no premium associated with it besides whatever you choose to contribute. This is a major reason why many Americans choose this type of retirement plan over indexed universal life.
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.
Universal life insurance policies come with a relatively high premium payment, but life insurance policies are worth setting up if you want to create an inheritance. Our guide to the types of life insurance can help you determine the right insurance policy for you.
When deciding between 401(k) vs. indexed universal life insurance, 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. While both can be used simultaneously, some financial experts recommend keeping them separate.
Frequently Asked Questions
What is indexed universal life insurance (IUL)?
Indexed universal life insurance is a type of permanent policy where a portion of your premiums are invested in a stock market index. You can borrow against this investment account or use it to cover life insurance payments later in life.
What are the benefits of indexed universal life insurance?
IULs provide investment opportunities not available with other permanent or term life insurance policies, making it extremely lucrative for high-income earners.
How much does indexed universal life insurance cost?
Universal life insurance rates are often the most expensive, and IUL rates average between $75-$125 per month for policyholders in their 30s.
What is a 401(k)?
A 401(k) is a retirement plan sponsored by your employer. Payments come directly from your paycheck, and your employer typically matches your payments up to a certain amount.
What are the benefits of a 401(k)?
The top benefits of a 401(k) are the no earnings caps or extra investments — whatever automatically comes out of your paycheck is all you need to invest. However, you have to reach a certain age before you can withdraw any money from your 401(k), or you face tax penalties.
Can I have both IUL and a 401(k)?
Yes, you can buy indexed universal life insurance to protect your beneficiaries and use the investment vehicle to supplement your 401(k). But monthly IUL insurance rates are very high, so speak with a financial advisor about your retirement plans before you buy.
Do I need life insurance?
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.
How much life insurance do I need?
How much life insurance you need 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. The amount should equal your current salary plus any hidden expenses, like health insurance costs, and an additional cushion for any unforeseen circumstances.
Your life insurance quotes are always free.
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Benjamin Carr
Former State Farm Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs. Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times...
Former State Farm Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.