Last Updated on July 27, 2023 by Ben
Life Insurance in 401(k)
Permanent life insurance goes along with an investment component, but it shouldn’t be relied on for retirement. A 401(k) is a less expensive alternative that delivers greater returns.
Most Americans save for retirement using a 401(k) provided by their employer, a Roth IRA, or a combination of both. Other standard investment accounts may be used to supplement those savings. Indexed universal life insurance, for example, can assist you in saving for retirement.
What is Life Insurance in 401(k)?
Life insurance may not be owned in a simplified employee pension or IRA, but IRS rules allow them in certain profit sharing and defined-benefit plans. These plans are usually difficult to manage and must follow strict criteria that limit the life insurance’s role to being “incidental” to the plan’s retirement benefits.
Life insurance vs. 401(k)
The use of life insurance to save for retirement isn’t usually advised, but it does have two advantages over a 401(k).
- Guaranteed interest: Although a 401(k) does not include an interest rate, most policies stipulate at least a minimal amount of 0%. This can help you avoid losses if the stock market falls unexpectedly.
- Liquidity: A policy’s cash value may be accessed at any moment, but 401(k) withdrawals before age 59-½ carry a 10% penalty as well as income taxes.
The disadvantages frequently outweigh the benefits of purchasing life insurance to save for retirement.
- High fees: Management fees are usually more than you’d find in a 401(k). A 401(k) has a typical expense ratio of 0.50%, while indexed universal life insurance might charge 3% or more.
- High premiums: A $500,000, 20-year term plan for 45-year-old male costs approximately $97.97 per month. A $500,000 whole life policy for the same profile would cost more than $827 per month.
- Low rates of return: Employee 401(k)s have grown by an average of 13.9% per year. This is much more than the 2-3% you would earn on a permanent policy.
Over time, these variances accumulate. The costs listed above would amount to $250 per year in a 401(k) versus $1,500 per year in life insurance when applied to $50,000 in savings.
Similarly, you could expect investment growth of $6,950 a year at 13.9% interest versus $1,500 a year at 3% interest, and you’d spend $729 more on life insurance each month to have whole life coverage.
How Much Does Life Insurance Cost?
Your life insurance premium is influenced by a variety of elements, including your age, gender, general health, the kind and duration of the policy you choose, as well as how much coverage you get.
Your rate will be lesser if you are in good health and younger. Women are typically less costly to insure since they have a longer life expectancy than men. Rates vary among firms, although not to the same extent for similar policy kinds and features, so comparing life insurance rates from several companies might help you save money.
When it comes to life insurance, determining the average cost might be difficult. Life insurers don’t publish premium information (other than the total amount of premium they write in a year), which may be for policyholders’ privacy.
The average price of life insurance from a certain organization would usually reflect the age and health of its policyholders. A firm with higher average premiums may be insuring either older clients, those with poor health, or a combination of both. On the other hand, revealing fair price information might jeopardize a company’s insureds’ privacy.
When to Use Life Insurance for Retirement Savings
Before you take a LIRP, make sure you limit out your retirement account contributions every year—that’s $19,500 for 401(k)s and $6,000 for Roth IRAs. If you wish for the same level of protection for your family that a traditional life insurance policy provides, a LIRP makes sense.
The majority of people do not require life insurance to augment their retirement funds. Permanent plans are five to 15 times more expensive than term policies, making it more cost-effective to invest in a different retirement account or post-tax investment account and purchase inexpensive, easy-to-cancel term life insurance coverage.
How to Use Life Insurance for Retirement Savings
You’ll need to have a permanent insurance policy if you opt for life insurance in your retirement plan. Each kind of policy has varying features, but the most important distinction is that they all earn interest in a distinct way.
Although whole life insurance has the greatest stability and simplicity of all investments, it will most likely return less interest than a riskier universal life insurance policy. Indexed universal life insurance is another possible alternative that offers (relatively) rapid cash value growth.
You may use cash value funds to assist your retirement in a number of ways:
- Cash value withdrawal: With some plans, such as universal life, you may withdraw funds from your cash value. Withdrawals are tax-free up to the total premium you’ve paid.
- Policy loan: A loan for life insurance does not come directly out of your cash value. Instead, the account is used as security. Taking more than you have in your account is not possible, and if past interest payments cause you to go over that limit, your insurance will lapse.
- Premium payments: Permanently insured policies also allow you to pay your premiums using cash value, which frees up that money for retirement expenses.
- Reduced paid-up insurance: This choice is available if you choose not to pay your premiums any longer. You can use your cash value to acquire a smaller, fully paid insurance policy this way.
- Surrender for cash: If you no longer require life insurance coverage, you may surrender your policy and receive a lump-sum payout instead.
How are Life Insurance Retirement Plans Taxed?
Unlike a 401(k), you don’t have to pay the penalty if you withdraw money from your cash value account before it matures. However, because withdrawals from your cash value are taxed in the same way as qualifying 401(k) withdrawals, you will be taxed on them.
You’re not taxed on withdrawals or policy surrenders with a value less than the amount you’ve paid into the plan so far (known as the cost basis of your coverage). However, any exceeds taxed as income.
Recommended IRA Companies
Augusta Precious Metals
Augusta, a family-owned company that has been in operation since 2012, has established its reputation for openness and honesty. BCA gave it the highest marks possible. Augusta provides a 100 percent money-back guarantee to new customers as well as guaranteed fair pricing and seven-day price protection to safeguard consumers’ confidence. For more information about costs, please contact the firm. Augusta has a fantastic buyback program as well.
For their clients’ storage requirements, Augusta collaborates with the highly regarded Delaware Depository. Vaults are located throughout the United States as a result of this partnership. There are no management costs since the account is self-directed.
Overall, Augusta’s client service is excellent, as evidenced by its high ratings. Augusta’s onboarding and transaction procedures are fully automated, with experts on hand to help customers with all of the required documentation. Customers are unable to do business over the internet, however.
American Hartford Gold
American Harford Gold is a family-operated firm that was founded in 2015. They specialize in assisting investors with Gold IRA accounts and the purchase of precious metals.
American Harford Gold has exceptional customer reviews on Trustpilot, TrustLink, and Google. They also rank highly with the Better Business Bureau and Business Consumer Alliance.
The firm’s primary business is the sale of gold and silver coins, bars, and bullion. It’s simple to open an IRA account with American Hartford Gold. With no deposit required, their industry experts guide you through a quick three-step process that takes less than 10 minutes. They also keep their Buyback Commitment, which has no penalties.
Goldco is a privately owned firm that specializes in asset and wealth protection. This business can assist you in moving assets from an education IRA, such as a regular or Roth IRA, to a precious metals IRA. Customers may also purchase gold and silver directly from Goldco.
Goldco provides both gold and silver IRAs. If you choose to invest in a gold IRA, you may fund it with a variety of gold IRA-approved coins.
Direct sales of precious metals are available through Goldco. You may acquire these coins by first creating an account on the Goldco website and then funding it with a bank transfer or a cheque.
If you’re unsure about working with Goldco, you can request a free kit to learn more about the firm. When you make a qualifying purchase, you may receive a 10%back in free silver.
Final Thoughts – Life Insurance in 401(k)
So, there you have it. While life insurance may not be the most exciting topic, it’s important to understand its role in your 401 (k) plan. Be sure to discuss with your financial advisor to see if adding life insurance is right for you. And remember, just because your company’s plan covers you doesn’t mean you shouldn’t still consider buying supplemental coverage.