Understanding the Difference Between Indexed Universal Life and 401(k) Retirement Plan.

Preparing for retirement is the goal of everyone who has the wits to plan for the future. However, setting up a personal retirement plan and sticking to it can be a monumental task. Thankfully, several tools can help you achieve your saving plans, such as Indexed Universal Insurance (IUL) and an employer-sponsored 401(k).


Both retirement plans possess similarities; however, they offer distinct advantages in helping you prepare for your retirement. This article provides an insight into both plans and how they benefit saving towards your retirement.


Indexed Universal Insurance is an insurance policy provided by an insurance company; here, the insurance policy covers your entire lifetime as long as you continue to make your payments. With the Indexed Universal Insurance, the insurance company pays a death benefit to your beneficiaries in the event of your demise.


A 401(k) is an insurance policy provided by your employer, which lets you make tax-advantaged contributions for retirement. With a 401(k) retirement plan, deductions are made through a salary deferral. The IRS regulates the 401(k) insurance policy; they limit the contribution made towards your retirement plan.


Indexed universal insurance allows you to build up savings that you can borrow against alongside securing a death benefit for your family and loved ones. A 401(k), on the other hand, offers you the option of investing on a tax-deferred basis; you also get to enjoy tax deductions for your contributions.


Both insurance policies are effective in helping you plan your retirement. Nevertheless, there are a few differences and benefits that separate one from another.


A 401(k) plan offers the benefit of free money, thanks to an employer matching contribution, which aids in growing your retirement savings. However, with an indexed universal insurance plan, all premiums must be paid by you.


A 401(k) plan also offers you the option of investing in index mutual funds or exchange-traded funds; however, you are not limited to those choices. Alternatively, you can invest in other securities and time-based funds with respect to your risk tolerance and saving goals. 


It gets even better; with a 401(k) plan, there is no cap on your return rate as the performance of those investments backs it. 


However, this is not the case with an Indexed Universal Insurance plan. Here, the returns are determined by the underlying index’s performance, which means that you earn a higher or lower interest rate based on the index’s performance. Furthermore, the insurance company places a cap on the returns of investment every year, irrespective of the performance of the underlying index.


It is important to note that one of the significant advantages of the Indexed Universal Insurance plan over the 401(k) plan is that it provides a death benefit to your loved ones. In a 401(k) plan, the money saved during your working years can only be accessed upon retirement, specifically when you are 72 years of age.


With the 401(k) plan, unless you are 60 years of age, you cannot take loans from saved-up funds without a penalty unless it is for medical emergencies, and you would still owe an income tax on the distribution.


The 401(k) plan is designed so that if you still work for the same employer at age 72, you are required to withdraw minimum amounts or face a tax penalty of up to 50% of your expected withdrawal.

However, with the Indexed Universal Insurance plan, a percentage of your insurance premiums is paid to a cash-value account, which you can borrow at any time. However, any unpaid loan is deducted from the death benefit at the time of your death; compared to a 401(k) plan, your beneficiary would inherit any outstanding loan.

While indexed universal insurance and 401(k) are retirement plans that help you save for the future, they are not entirely similar and cannot be substituted for one another. A 401(k) might be an excellent place to start preparing for retirement, as your workplace provides it. 

However, you may still opt for the Indexed universal insurance in addition to your workplace retirement plan, as a 401(k) plan includes investment fees as well as fees on the 401(k) plan. Moreover, the Indexed universal insurance helps you access life insurance and a guarantee of income for your loved ones in case of your demise.


Nevertheless, if you are unsure what plan is best for you, kindly consult a financial advisor to help you make the most of your 401(k) plan and help you decide if the indexed universal insurance is right for you.

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