401(k) vs. Life Insurance: Comparing Your Retirement Savings Options

401(k) vs. Life Insurance: Comparing Your Retirement Savings Options

May 01, 2023

When it comes to saving for retirement, the options can seem endless. From 401(k) plans to IRAs, to Roth IRAs, health savings accounts, even life insurance policies, there are a variety of financial vehicles that allow you to set aside and invest funds for your future. But when it comes down to allocating your funds between accounts, what should you consider? Here we discuss the basics of the 401(k) vs. life insurance debate. 

How Life Insurance Can Help You Save for Retirement

Term life insurance policies are similar to other types of insurance policies, like auto or home. These term policies cover you for a period (the term) and expire without a payout if you do not make a claim. But whole life insurance policies combine the benefits of insurance with some savings and investment features, and they can help you accumulate a lump sum for retirement even if you do not ever make a life insurance claim. 

A life insurance policy that holds cash value has several advantages when it comes to saving for retirement. First is the guaranteed interest rate. Unlike funds invested in stocks or bonds that can fluctuate in value, many whole life insurance policies provide a guaranteed rate of return on all funds invested. And with interest rates (and inflation) on the rise, having guaranteed income can provide much-needed flexibility.

Another benefit of a life insurance plan is the lack of restrictions surrounding withdrawals from the account. Withdrawing funds from a 401(k) or IRA may require you to pay an early withdrawal penalty if you have not yet hit retirement age. On the other hand, you should be able to withdraw funds from a whole life insurance policy at any time without paying any additional fees.

Benefits and Features of a 401(k)

A 401(k) plan, like an IRA, is a portable account that allows wage-earners to put aside funds for retirement. Except for Roth 401(k)s, the funds contributed to a 401(k) are pre-tax, lowering your taxable income. When you hit retirement age, you will be able to withdraw 401(k) funds and pay taxes on any withdrawals. Under some conditions, you may be able to take early withdrawals from a 401(k) plan without paying a penalty—for example, if you are purchasing your first home or paying medical bills.1

In some cases, you may be able to combine your 401(k) with a life insurance policy by using a portion of your 401(k) funds to purchase and pay premiums on a whole life insurance policy. This option may not be available for all 401(k) account holders, however. 

There is no one-size-fits-all answer when it comes to saving for retirement. The right savings vehicle for you will depend on your age, risk tolerance, income, family size, financial goals, and retirement plans. By discussing your choices with a financial professional, you will be able to get a clearer look at what savings options are available.


Important Disclosures:

This material was created for educational and informational purposes only and is not intended as ERISA, tax, or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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1 8 ways to take penalty-free withdrawals from your IRA or 401(k), Bankrate, https://www.bankrate.com/retirement/ways-to-take-penalty-free-withdrawals-from-ira-or-401k/