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Life Insurance vs. Roth IRA: Retirement Guide


When choosing where to set aside money for retirement, you need to weigh your options carefully. You’re likely going from one main income source to multiple smaller income sources when you retire. You may also want buy some security for your family in case you die unexpectedly. Sometimes, those two goals can be in conflict with one another, meaning you’ll have to figure out how to achieve them both. One way this can be achieved is using a combination of a life insurance policy and a Roth IRA. Let’s look at how those two products work and how you can use them.

For more help with both insurance and retirement planning, consider working with a financial advisor.

Life Insurance Vs. Roth IRAs

Life insurance and Roth IRAs are two different products. One is a policy you pay for in exchange for a payout when you die. The other is an investment account in which you can stow away money that will grow with the market tax-free. Each has its pros and cons, with its own unique reasons for investing.

Life Insurance Pros and Cons

Life insurance works like any other insurance product. You pay a premium upfront in exchange for a payment when needed — in this case, a payment to your family after you die. The cost of that premium will depend on many factors, such as your health and the type of coverage you sign up for. The money your family gets will be tax-free and can be used for funeral costs, estate taxes and other financial burdens.

However, there are some downsides to life insurance. First of all, premiums are expensive. Adults over the age of 55 can expect to pay more than $1,000 per month for a whole life insurance policy of $500,000. If you pay that for 20 years, that’s $240,000. You could have invested that money or spent it in other places where you needed it.

Another major downside is that this money is for after you die, meaning it can’t help you during retirement. You can borrow against your life insurance policy, but it’s generally not recommended. You can take advantage of a life insurance retirement plan (LIRP), but any money that you borrow will have to be paid back with interest. If you have a retirement account, you can use that to fund your retirement. That’s not something you can do with a life insurance policy.

Roth IRA Pros and Cons

Roth IRAs are great options for planning your retirement. They are funded with money you’ve already paid income tax on, so any money that’s withdrawn is tax-free. That means you can see funds grow with the market without having to worry about paying taxes on them when you go to withdraw. Your beneficiaries also won’t have to pay income tax on your Roth IRA if they inherit it. After the age of 59 1/2, there’s no withdrawal penalty for your Roth IRA, so you can take the money out and do it as you wish.

The big downside to a Roth IRA over a life insurance policy is that your beneficiaries will have to pay estate tax on inheriting an IRA. You also won’t have the protection of a policy in place when you die. Another downside to consider is contribution limits. For 2024, you can only invest $7,000 in an IRA if you’re under the age of 50, or $8,000 if you’re over the age of 50.

Deciding Between Life Insurance and a Roth IRA

life insurance vs roth ira

Deciding where to invest your money depends on where you are in life. A Roth IRA benefits those who are planning their retirement now, especially for younger workers, and plan to live off those funds. They may not expect to leave a lot of money in their IRA when they die. Also, a Roth IRA may be attractive when there is concern about taxes on retirement money withdrawals.

Life insurance can become more appealing as you get closer to death. Having the assurance that your beneficiaries will inherit a policy makes the money spent worthwhile. On top of that, the inheritance of the policy is free of estate tax. If you suspect you’ll leave a large estate, leaving it in an insurance policy can be beneficial to your heirs.

Given the numerous variations in types of life insurance, this approach offers many ways to pay for retirement. For example, a life insurance retirement plan (LIRP) is a permanent life insurance policy that you over-fund over the lifetime of the policy. This builds value in what is known as the plan’s cash account. You can access this money by taking out loans against the account’s balance.

Of course, one option is to put some of your money into a Roth IRA and also buy a life insurance policy. This way, there is some tax-free money for your family after your death and you have money to live off of while you are retired.

Bottom Line

life insurance vs roth ira

When comparing a Roth IRA and life insurance, it’s easy to see that both are beneficial to have. Note that there are a large variety of life insurance products. What’s right for you depends on where you are in life and the level of security you want. Roth IRAs are better for a retirement income, but life insurance can offer other benefits, particularly when leaving your estate to your heirs.

Retirement Planning Tips

  • Industry experts say that people who work with a financial advisor are twice as likely to meet their retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Planning for retirement? Use SmartAsset’s retirement calculator to determine how much you’ll need to save to retire comfortably and confidently.
  • If you’re employer offers 401(k) matching, you need to take full advantage of it. It can be a way to quickly grow your savings. SmartAsset’s 401(k) calculator can help you estimate your total retirement savings based on your contributions and how much your employer matches.

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