Looking to buy permanent life insurance but not sure how to start? Not sure if you should choose Index Universal Life Insurance, Roth IRA, or a 401(k) plan? If that’s the case, you may not understand the differences between Index Universal Life Insurance vs. 401(k) or Index Universal Life Insurance vs. Roth IRA. They’re similar in some ways, making it confusing to decide which of the three is your next best move.
No worries—I’ve got you covered!
In this article, we’ll break down permanent life insurance in full detail. You’ll find out what permanent life insurance is: its pros and cons, and how you can use it to protect your loved ones financially. I’ll also discuss one of the most important (and often overlooked) types of permanent insurance – Index Universal Life Insurance (IUL) – and how it compares to the retirement accounts you might be considering. Get ready to discover all the differences between Index Universal Life Insurance vs. Roth IRA and IUL vs. 401(k) that no one mentions, so you can better manage your money.
Permanent Life Insurance Explained
Permanent life insurance is a general term used to describe life insurance policies that don’t expire (they have a permanent duration). According to your legal contract with your insurance provider, your beneficiaries will receive guaranteed death benefits when you die, as long as you maintain your premium payments. If you stop your scheduled payments, the insurer has the right to terminate your permanent life insurance coverage.
Besides death benefits, permanent life insurance policies allow you to earn money through a cash value account. Unlike your life insurance inheritance, the accumulated cash isn’t locked until you pass away. You can access the funds from your cash value account at any time—whether you’d like to cover a medical emergency, pay it towards tuition, or use it as collateral for loan approval.
The principal caveat is that insurers will deduct the cash value spent from the total death benefit your beneficiary receives. As a result, it might be in your family’s best interest if you allow the cash value account to grow untouched.
How Does Permanent Life Insurance Work?
The value of your permanent life insurance coverage depends on factors like your current income, living expenses, number of dependents, estimated funeral costs, mortgage balance, and other outstanding debt.
Before consulting an insurance agent or purchasing a policy, you should learn the basics of permanent life insurance. The value of your insurance plan will also determine the cost of your premiums. You can schedule your premiums monthly or annually, or you could pay in full (in a single lump) and maintain your coverage indefinitely.
When you pay permanent life insurance premiums, some of that money covers your insurance expenses. The remainder goes toward your cash value account and increases based on your permanent life insurance policy. Some policies will add compound interest to your account balance. Others accumulate investment profits.
When you die, your beneficiary inherits the policy’s death benefits but not the cash value.
While permanent life insurance doesn’t expire, there are a few exceptions. Some policies have a maturity age when the insurer ends your contract and pays you the cash value. This isn’t usually an issue because these policies’ maturity age is between 100 and 121 years old. On average, life expectancy is 74.5 for men and 80.2 for women, which means that most permanent life insurance plans will outlive their policyholders. Therefore, you’re unlikely to run out of coverage!
Do I Need Permanent Life Insurance?
The benefits of permanent life insurance make it an attractive offer for consumers. However, the perks of earning money while protecting your family’s well-being come at a cost. Permanent life insurance isn’t suited for every financial situation. It’s important that you understand whether this type of coverage matches your goals.
A permanent life insurance policy might be right for you if:
- You want to build a trust for your child or a minor.
- You hope to create a financial legacy for your beneficiaries.
- You have a disabled dependent who will need life-long support and financial resources.
- You exhausted your retirement savings and want guaranteed coverage to handle your burial arrangements.
- You haven’t built substantial savings to cover unexpected end-of-life medical bills or funeral costs.
- You need life insurance and are interested in creating another investment vehicle.
If we’re comparing permanent life insurance to a retirement account, like Index Universal Life Insurance vs. Roth IRA or IUL vs. 401(k), you should also understand the purpose of these plans.
Retirement accounts such as Roth IRA or 401(k) make saving enough cash to sustain your needs easier when you stop working. However, retirement accounts are not savings accounts—they’re more profitable. Savings accounts only contain the money you put into them, whereas retirement accounts help you save and multiply your money. That’s where we start seeing similarities between permanent life insurance policies like Index Universal Life Insurance vs. Roth IRA and IUL vs. 401(k) because IUL allows you to grow your income, too!
Types of Permanent Life Insurance
Below, we’ve highlighted the two main types of permanent life insurance to help you determine which aligns with your financial goals.
Whole Life Insurance
Whole Life Insurance is the most common type of permanent life insurance. One of its benefits is the fact that most of the terms of Whole Life Insurance remain constant. For example, the policy operates under fixed premium and interest rates for its entire duration. The death benefit also remains at the same value as your insurance contract. Unfortunately, the cash savings account typically has minimal growth because of the policy’s low interest rates.
Whole Life Insurance is best suited for someone looking for consistent insurance policy terms.
Universal Life Insurance
Universal Life (UL) Insurance is more flexible than Whole Life because it allows you to adjust your premiums or decrease your death benefits. This feature allows you to lower your monthly payments when you need to allocate more cash to your personal expenses or other financial priorities. Once you’ve accumulated substantial cash value, you can also use the money in your policy’s account to cover your premiums instead of paying out-of-pocket.
Generally, Universal Life Insurance is more costly than a traditional life insurance policy. There are variations of Universal Life coverage that are even more customizable, such as:
- Index Universal Life Insurance allows you to earn cash value by investing in a stock market index.
- Variable Universal Life Insurance provides the option to invest in multiple financial markets.
- Survivorship Universal Life Insurance provides coverage for couples and releases death benefits only after both insured parties die. This is cheaper than purchasing two separate permanent life insurance policies.
- Guaranteed Universal Life Insurance offers Universal Life’s flexibility with minimal to zero cash value benefits.
Is Funeral Insurance The Same As Permanent Life Insurance?
Funeral Insurance is a more restrictive type of permanent life insurance. You can only apply for coverage below $50,000, which means the death benefits will only cover your burial needs. There’s no financial support for your family.
Most people apply for funeral insurance if they’re running on a tight budget or were recently diagnosed with a serious health condition. Fortunately, insurance companies don’t ask you to submit a medical report for Funeral Insurance. This makes it easy to get approval but costly to apply.
Advantages and Disadvantages of Permanent Life Insurance
The benefits of purchasing a permanent life insurance policy include:
- Guaranteed financial coverage for your beneficiaries (which isn’t included with retirement accounts if we compare the benefits of a plan like IUL vs. 401(k) or Roth IRA).
- Annual dividends are added to Whole Life Insurance cash value accounts.
- Adjustable premiums with Universal Life Insurance policies (comparing IUL vs. 401(k), you might also be able to adjust your retirement account contributions depending on the terms of your plan).
- Accumulated cash value opportunities with every premium payment.
- Accessible funds while you’re still alive.
- Tax-deferred dividends and interest are added to your cash value account (another similarity between Index Universal Life Insurance and Roth IRA is that both accumulate cash by adding interest to your account—but Roth IRA interest can be taxable).
- Tax-free loans can be taken from your cash value account.
However, permanent life insurance may also carry the following disadvantages:
- Expensive premiums, especially with Universal Life Insurance policies.
- Annual dividends may not apply to Universal Life cash value accounts.
- Outstanding policy loans and cash value withdrawals are deducted from the total death benefit.
Is Permanent Life Insurance Worth It?
The best way to determine the value of permanent life insurance is to compare it to other options on the market. Here are a few examples:
Term Insurance vs. Permanent Life Insurance
You may wonder, “is it better to get permanent or term life insurance?” It depends on your circumstances.
Term life insurance typically lasts between 5 to 30 years. Once your policy matures, you’ll have to reapply and pay a higher premium. Permanent insurance is more convenient because your policy won’t expire—there’s no need for multiple applications.
Moreover, some types of permanent life insurance (like Whole Life) offer fixed premiums for your policy’s duration. You may not need to worry about increasing rates. Additionally, one of the most significant benefits of permanent life insurance is your ability to increase cash value through your premiums. Term life policies don’t offer any investment options.
Nevertheless, term life insurance policies offer cheaper premiums. In some instances, you may even consider purchasing term life as a policy rider for permanent insurance. This would be appropriate if you need more coverage but can’t afford a higher rate on your current permanent life insurance policy.
Index Universal Life Insurance vs. 401(k)
Many people use Index Universal Life Insurance (IUL) as a retirement fund because of its accessible cash value account. When comparing Index Universal Life Insurance vs. 401(k), 401(k) is a traditional retirement plan that deducts contributions from your salary toward your savings.
Retirement plans don’t offer death benefits or insurance coverage. With a 401(k), your employer might match your contributions as part of your work benefits, whereas with IUL, it’s your full responsibility to pay your premiums.
Tax law is another key factor to look at when comparing Index Universal Life Insurance vs. 401(k). All investments and cash value withdrawals made through your Index Universal Life Insurance are tax-free. However, while 401(k) uses pre-taxed dollars to build your retirement savings, you’ll be charged a tax penalty for withdrawals made before age 59 1/2. Your beneficiaries will also have to pay taxes on any inherited funds from your 401(k) account.
However, 401(k) allows you to diversify your investments into mutual funds, target dated funds, and exchange trades. Moreover, there’s no limit to the amount of interest you can gain. On the other hand, Index Universal Life policies only provide investment opportunities through stock indices. Your insurance provider also places a cap on the interest added to your cash value account, so you’ll never receive the total profit from your investments.
Index Universal Life Insurance vs. Roth IRA
Roth IRA is an individual retirement account that you can use to accumulate tax-free earnings from your after-tax contributions. You’ll pay taxes on the money before it’s deposited into your account and enjoy tax-free withdrawals.
While all the money transferred to a Roth IRA contributes to financial growth, only a percentage of your IUL Insurance premiums will go towards your cash value investment.
There are no minimums on the amount of money you can contribute to your Roth IRA. However, your contributions are limited to the IRS limits. For 2022, the limit is $6,000 if you’re under 50 years old and $7,000 if you’re over 50. In addition, there are income limits for those who can contribute to a Roth IRA. Nevertheless, a Roth IRA gives you more freedom and control over your savings.
On the contrary (when comparing Index Universal Life Insurance vs. Roth IRA), your Index Universal Life Insurance investments will decrease yearly since insurance premium rates increase with age. If you want to reap substantial benefits from your IUL Insurance policy, you’ll need to deposit more money into your cash value account.
However, one similarity between the two when looking at IUL vs. Roth IRA is that they both have upper limits. The IRS places a cap on the total annual contributions you can make toward your Roth IRA account, similar to how insurance companies cap your investment returns.
IUL vs. Roth IRA: Long-term savings opportunities
I recommend opening a Roth IRA account if you want a long-term savings account. Compound interest may not deliver immediate returns, but it can accumulate into sizable savings if you start investing early. When comparing IUL vs. Roth IRA, an IUL account is still a good option for growing tax-free cash value. However, it may require more effort on your part to amass significant earnings.
Should I Get Permanent Life Insurance?
Your eligibility for permanent life insurance is unique to your background and financial circumstances. That’s why it’s crucial to partner with a qualified financial expert who can guide you through the decision process.
If you’re ready to take the next step to ensure your family’s financial future, sign up for a free consultation now to discover the best life insurance policy for your needs.