401(K) vs. Indexed Universal Life (IUL) Insurance: Which Is Better for You (2024)

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 insuranceis 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 insuranceterms 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).

Read more: Equity-Indexed Universal Life (EIUL) Insurance

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.

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.

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.

Case Studies: Exploring Retirement Strategies

Case Study 1: John’s Retirement Strategy

John, a 45-year-old professional, was torn between investing in a 401(k) or indexed universal life (IUL) insurance for his retirement. After careful consideration, he opted for a 401(k) due to its simplicity and employer match benefits.

John believed that the growth potential of his contributions, combined with the employer match, would provide him with a substantial retirement fund.

Case Study 2: Sarah’s Wealth Protection

Sarah, a high-income earner, sought a comprehensive retirement and protection plan. After consulting with a financial advisor, she decided to invest in an indexed universal life (IUL) insurance policy alongside her employer-sponsored 401(k).

Despite the higher premiums associated with IUL, Sarah valued the additional death benefit and the ability to make non-taxable withdrawals for her retirement income.

Case Study 3: Mark’s Conservative Approach

Mark, a risk-averse investor nearing retirement, was concerned about potential market crashes affecting his savings. After thorough research, Mark chose to prioritize the safety of his investments and opted for a 401(k) plan.

While he recognized the potential growth offered by an indexed universal life (IUL) insurance policy, Mark decided that the loss protection provided by a 401(k) outweighed the additional benefits of IUL.