Most people know they have to plan for retirement, but it seems so overwhelming and there are so many places to put your money that many people put off doing anything. However, it’s crucial to save for retirement because Social Security benefits alone are probably not going to provide for a comfortable retirement. IUL and Roth IRA’s are two financial products to consider as you approach your golden years. Let’s take a look at the similarities and differences of these two options and see which one is better for you.
Indexed Universal Life Insurance or IUL for Retirement Savings
IUL is a permanent life insurance product with a cash value account on the side. The cash value account grows based on an Index such as the S&P 500. You’re not really investing in the market, but the percentage the account earns is based on the index. You can lose money if the index loses money, but the index has returned an average of 9.8% annually for the past 90 years. You can either withdraw from the cash value or take a loan against it to supplement your retirement income, and the money you withdraw from the policy is always 100% tax-free.
Pros of IUL:
- Provide permanent life insurance coverage and retirement savings account in one policy
- Cash value builds more quickly than other permanent life insurance policies
- Heirs will get a tax-free lump sum
- No capital gains taxes
- Gives an opportunity to invest in the market without taking on a lot of risk
- Floors mean you won’t lose money in the cash value account, even if the market loses money. Different insurance companies have different floor rates. Be sure to check out our recommendation of the 6 best IUL companies for your consideration.
- No limits on how much you can add to the account
- No penalties and age restrictions when you want to withdraw money from the policy as long as there is money in the cash value account.
- You never have to pay income tax when you withdraw money from IUL policies
- You can always get an IUL policy however high your income might be
- For high-income people, the death benefit can cover the giant tax bill all of their other investments will bring about
IUL for Income Protection and Retirement Income
Cons of IUL:
- Caps limit the amount of money you can earn. Even if the index increases 30%+ in a great year, the cap rate that insurance companies have one the policy means that the cash value account will gain the cap rate only. Cap rates are usually from 8-12%, depending on the IUL product and the insurance companies. See our recommendations of the 6 best IUL companies for your consideration.
- Complex and not easily understood
- Can be considered high fees if people compare an IUL policy with an investment account such as Roth IRA. However, people often forget that an IUL policy offers permanent life insurance coverage as well and the cost of providing permanent life insurance coverage can be high as people age.
- Needs management to work properly
- Premiums go up as you age because cost of providing permanent insurance coverage will increase as you get older.
Roth IRA for Retirement Savings
A Roth IRA is also a tool for retirement planning. You invest your after-tax dollars in a Roth, so that when you retire, the withdrawals are tax-free as well. Your income must be below a certain level to qualify, and you must have earned an income (as opposed to money from pensions, investments, or properties).
Pros of a Roth:
- Investing with after-tax income means withdrawals are tax-free
- Can often tap into the money in an emergency without incurring penalties
- No required minimum distributions (or RMD)
- Tax-free growth and withdrawals
- You can choose what you invest in
- No caps, but no floors either
Cons of a Roth:
- High-income people don’t qualify
- Limits on how much you can contribute (for 2020, it’s $6,000, or $7,000 if you’re over 50)
- Not offered by employers, unlike 401(k)’s
- No tax deductions (as there are with traditional IRA’s)
- Withdrawing money before you turn 59 and ½ incurs a 10% penalty
Which One is Better for Retirement Savings
Both are solid choices for retirement planning. If you invest early and max out the account, a Roth IRA might be enough to fund your retirement when combined with Social Security benefits. On the other hand, IUL offers both permanent life insurance coverage and tax-free cash in retirement, and heirs will get the death benefit, also tax-free.
If you might need permanent life insurance coverage and want to have the flexibility and possibility of using the death benefit of the policy for retirement income while you are still alive, nothing is better than an IUL policy. If you don’t need permanent life insurance, a Roth IRA account might suffice.
The bottom line is that both have a spot in a well-rounded portfolio to fund retirement.