401(k) vs. Indexed Universal Life: Which Coverage is Right for You (2021)

Deciding on a 401(k) vs. indexed universal life insurance (IUL) comes down to long-term goals. A 401(k) offers more stability in investments with no chance of a cap on investment gains. An IUL policy allows for a higher interest rate attached to earnings but also carries more inherent risk. When it comes to choosing between a 401(k) vs. indexed universal life insurance, a 401(k) may be the best place to start — especially if you work for a company that matches contributions.

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Natasha McLachlan is a writer who currently lives in Southern California. She is an alumna of California College of the Arts, where she obtained her B.A. in Writing and Literature. Her current work revolves around insurance guides and informational articles. She truly enjoys helping others learn more about everyday, practical matters through her work.

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Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance for 10 years. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate...

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Reviewed by Laura Walker
Former Licensed Agent

UPDATED: Jul 16, 2021

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The Rundown

  • A 401(k) allows you to invest on a tax-deferred basis while earning a tax deduction for all contributions
  • With indexed universal life (IUL), you can accrue a death benefit for your loved ones that you’re able to borrow against
  • A 401(k) is often the first place to start when creating a plan for retirement

If you are working on creating a retirement plan for yourself or your spouse, you certainly want to be educated on all of the tools you can utilize to meet your savings goals.

You might be trying to decide between two extremely common routes people take when planning for their retirement: 401(k) vs. indexed universal life insurance (IUL).

With a 401(k), you can invest money that is tax-deferred while reaping the benefits of a tax deduction for contributions you make to your 401(k).

In contrast, indexed universal life insurance is typically helpful if you want to accrue death benefits for your loved ones upon your passing while also having the option to borrow against life insurance funds if and when you need to.

You need to understand the similarities and differences between a 401(k) and an IUL policy as you plan for your future and retirement.

After learning more about affordable 401(k) vs. indexed universal life insurance options, enter your ZIP code into our free tool above to find quotes for the best life insurance in your area.

401(k) vs. Indexed Universal Life: What do they do?

A 401(k) is a type of retirement plan that allows you to set money aside and receive a tax advantage.

Contributions to your 401(k) are typically deducted from your paycheck rather than having a salary deferral. Some employers offer to match 401(k) contributions up to a certain amount or percentage, which is set by the IRS.

A standard 401(k) will make contributions using pre-tax dollars, meaning any income you contribute to your 401(k) will be removed from your taxable income for the year.

Once you use your 401(k), you will pay income tax on withdrawals. Additionally, early withdrawals — before age 60 — could result in an additional 10% early withdrawal penalty.

Traditional 401(k) plans do not offer any death benefit components. Rather, individuals are required to begin taking at least the minimum distributions from a 401(k) no later than age 72.

In contrast to a 401(k), indexed universal life insurance is a type of whole life insurance investment that covers you the rest of your life — provided you keep up with paying your premiums.

After you pass away, your IUL pays out a death benefit to the beneficiaries listed.

An IUL policy can accumulate cash value since part of the monthly premium you pay is allotted to a cash-value account. This account follows the ups and downs of a stock index and credits the cash value portion of a policy with interest for each year.

With regard to risk, an IUL policy is in the middle of the road. Because it does not offer a guarantee on a rate of return, there is a slight risk. But IUL insurance is not invested in mutual funds or other securities, which keeps the risk fairly minimal.

Because an IUL policy accumulates cash value, you are able to borrow against that amount if you ever need to. Of course, any amount you take from the account will be deducted from the death benefit your loved ones receive.

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401(k) vs. Indexed Universal Life: Which is best for retirement?

While both a 401(k) and an IUL policy are tools that can be used to help with retirement, they have some stark differences.

A 401(k) allows you to invest in index mutual funds or EFTs without locking you into either of those solely. You can choose other funds and securities based on your goals and risk tolerance.

While your rate of return is tied to the funds and investments you choose, there is no cap on the gains. So you will see the full percentage reflected in your 401(k) balance.

On the other hand, an IUL policy’s returns are tied to an underlying index. If the index performs well, your insurance policy will earn higher interest rates. But if the index does not perform well, there’s a chance your returns could shrink.

With this in mind, while you could use something like an IUL calculator to help you figure out how much your investments could be worth, there’s no way to know for sure because of potential fluctuations.

Additionally, the insurance company you have the IUL policy with can choose to cap the rate of return that you get each year, irrespective of the underlying index performance.

401(k) vs. Indexed Universal Life: The Best Decision

Is an IUL better than a 401(k)? Is there a definitive place to begin when starting to plan for retirement? When it comes to 401(k) and indexed universal life insurance pros and cons, there are countless opinions.

Anything you can do to create and grow a retirement fund is a good option.

But if you’re curious whether you should buy into your 401(k) vs. an indexed universal life insurance policy, it might be better to start with a 401(k) and then move on to additional options as your investments grow.

If your work offers a 401(k) program, start by matching the company’s contributions. Then you can decide whether you want to pursue an IUL policy or other type of life insurance to supplement additional savings.

If you’re searching for additional information about 401(k) and indexed universal life insurance quotes, enter your ZIP code into our free tool below to browse multiple options.

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