Index Universal Life Insurance (IUL) is a life insurance product that offers the opportunity for investment growth, while a 401k prioritizes long-term savings with employer-matching features. Both types of plans offer tax advantages, though most people are unfamiliar with all the benefits of an IUL and all the negatives surround 401k plans.
What Is Indexed Universal Life Insurance?
Index universal life insurance (IUL) is a type of permanent life insurance that allows for more flexibility than some other policies such as whole life and term life. An IUL lets you choose your premiums and how much cash value you want to place in a fixed-rate or equity-indexed account. The cash value component of IUL policies is typically tied to indexes such as the S & P 500 or Nasdaq 100.
The IUL policies offer a death benefit to your named beneficiaries in the event of your death.
IUL policies typically provide a measure of predictable financial stability by capping your market returns and guaranteeing a minimum interest rate.
What Is a 401(k)?
A 401k is a type of employer sponsored retirement savings plan that lets you contribute a portion of your paycheck into an investment account. A 401k offers a tax-free method to grow your retirement income. You can choose as little as you want to contribute up to a maximum contribution limit set by the IRS, which is $23,000 as of 2024. A typical 401k allows employees to invest in mutual funds or exchange traded funds (EFTs) rather than individual companies.
Your employer may offer to match your 401k contributions and some plans require employers to contribute. The maximum an employer can match is up to 6% of an employee's contribution. If you leave your employer who offered the 401k, you might have the option to roll over your 401k to new employer's 401k program or into an individual retirement account (IRA).
Pros and Cons of IUL
Here are some benefits and potential drawbacks of an IUL policy
Pros
Provides dual benefits of a life insurance policy and cash value growth.
Offer tax-free capital gains, cash withdrawals and loans.
Offers flexibility to adjust your premiums, riders, death benefits and investment risk.
Your money is not subject to the ups and downs of the market swings
Your money is not subject to all the investment and hidden fees of 401k and mutual funds
Your contributions are after-taxed so you are able to withdraw tax-free
Cons
Companies often cap gains at a certain amount
This is a long term is strategy
Any cash value can be lost if your policy lapses
Pros and Cons of a 401k
Having a clear understanding of the potential pros and cons of a 401k can benefit those considering retirement savings options.
Pros
Offers no limits on growth potential
Unlike an IUL policy, employers often match contributions to accelerate investment growth
Contributions are pre-tax and reduce your owed income tax
Cons
You will get penalized for withdrawing fund before age 59 1/2
Returns are subject to the risk of market downturns
Once your money is whisked away into this account and with a few exceptions you can't access it for another 20-35 years unless you to pay a massive penality.
You can't predict your tax rate in the future so you very likely be paying a higher tax rate when you are able to finanlly access your money. The only way the government can generate income is by raising taxes and with our debt levels it is very likely taxes will be higher. This completely destroys the whole tax-deferred argument
Companies that don't have an employer match pay higher salaries. The Center for Retirement Research did a study based on tax data and showed that for every dollar an employer (on average) contributes to a 401k match, they pay 99 cents less in salary. Also employers may spread it out over 4-6 years (six years is the regulated max.). If you leave before the six years, you often don't get the match.
The 401k plans come with fees. There is a cost to these plans. There is management fees, then there is a cost in the mutual funds that money is placed into. Many mutuals might even charge extra fees for marketing. The average person doesn't look at all the fine print detailing fees and even if they did, it is confusing how they are written. These fees eat away at your savings
Yes, you save tiny amounts on taxes when you are young. But this is also the period when you have the biggest tax write-offs relative to your income (dependents, business expenses, etc.) . Trust you will be fully taxed at the highest rate when you pull money out 30 years in the future.
The Unpredictable market returns. When you are young you can afford to overcome the downturn in the market but as you come close to retirement you can not afford a massive downturn in the market and unfortunately no one knows when this will happen
How To Choose Between IUL and 401(k)
If you are deciding betwen an IUL policy and a 401k for retirement savings, an IUL offers lower risk and allow for early cash withdrawals that you can't make with a 401k.
An IUL policy holder recieve a death benefit
An IUL policy holder can also be covered for critical/chronic/terminal illnesses cover thru living benefits. This money can be used for medical bills, fund health deductibles & copays, replace income, fund experimental treatments not covered under health insurance
It can offer a versatile way to address your needs for life insurance and investment income at the same time
An IUL is portable so you can take it with you when you leave your job.
You can actually have multiple IUL policies unlike only one 401k
If you have a high networth an IUL plan can help lower your taxable income and offers tax-free capital gains, withdrawals and loans
Your exposure to potential losses of the market are limited.
A licensed professional on my team can help guide you through these and other types of retirement strategies.
コメント