Could your life insurance be a secret weapon for retirement?
Life insurance traditionally ensures your loved ones are taken care of after you pass away. But what if it could do more, like help pay for your retirement? Indexed Universal Life (IUL) insurance is creating a buzz on social media for this very reason. But can it really outshine the tried-and-true 401(k)?
The Battle of Retirement Plans: 401(k) vs. IUL
For many, the 401(k) plan is the gold standard for retirement planning. According to the Bureau of Labor Statistics, 52% of private sector employees with access to an employer-sponsored retirement plan chose to participate in 2022.
But social media influencers are championing a different approach: Indexed Universal Life Insurance (IUL).
“A lot of people are thinking about creative ways to save for retirement,” says Mindy Yu, a certified investment management analyst and director of investing at Betterment. “This came up as a solution because, hey, you’re actually invested in the market and this … also provides life insurance coverage.”
Before you consider swapping your 401(k) for an IUL, let's break down the differences and see which might suit your needs better.
What Makes Indexed Universal Life Insurance Special?
An Indexed Universal Life Insurance (IUL) policy is a type of permanent life insurance, which means it includes a death benefit and a cash value component. This cash value grows tax-deferred and can be accessed during your lifetime.
The unique feature of an IUL is how the cash value grows. You can choose stock and bond indexes for your policy to mirror, like the S&P 500. Your insurance company then pays interest based on the index’s performance.
With the historical average stock market return around 10% annually, some social media creators claim the cash value growth could be substantial enough for retirement. But beware—market volatility means returns will fluctuate. Some years, you might earn more, others less. Plus, there’s often fine print that affects how these market movements impact your policy.
“Some may have caps on how much you can earn relative to the index,” Yu explains. “Let’s say the S&P climbs 10% in a year, but you’re capped at 5%. That’s the max you can have.”
Conversely, if the market performs poorly, your cash value might be protected against the full loss.
The 401(k) Advantage
A 401(k) plan, on the other hand, is fully invested in the market with no caps on gains or losses. A significant advantage is that many employers offer a match on your contributions, which is essentially free money for your retirement.
However, 401(k) plans are designed for long-term investment. Withdrawing money before age 59½ for nonqualified reasons incurs penalties and taxes.
Why Consider an Indexed Universal Life Insurance for Retirement?
Indexed Universal Life Insurance (IUL) policies can offer earlier withdrawals compared to 401(k) plans, which is where many social media creators see the benefit. On top of financial support for your loved ones, policyholders can tap into the cash value earlier, potentially tax-free if only the contributions (not earnings) are withdrawn.
“So it gives you more liquidity, and in moments that you have cash flow issues, you might be able to tap into that money,” says Nadia Fernandez, a certified financial planner at Financial Finesse.
But building a substantial cash value can take around 10 years, and using it like a savings account carries risks. Withdrawals might affect your death benefit, and if the market has declined, it could mean higher premiums to keep the policy active.
The Bottom Line
While Indexed Universal Life Insurance (IUL) policies offer flexibility and early access to funds without penalties, they come with complexities and risks that aren’t as prevalent in traditional retirement plans like 401(k) plans.
If you’re contemplating an IUL to fund your retirement, consider this a signal to evaluate your current financial strategy and ensure you have robust short-term solutions, like an emergency fund.
Want to explore how Indexed Universal Life Insurance (IUL) or 401(k) plans fit into your financial future? Contact us today for a personalized consultation.
