Regular readers know that my standard answer to most questions is the same, “It depends.” But in this situation, there is a bit more. Whole life insurance and Roth IRAs both have a place in a family’s financial planning game plan. But they are generally different vehicles with different purposes and with different strengths and weaknesses.
Often, this question is about tools to use to save for retirement.
First, whole life insurance is life insurance first, not retirement savings. An overview:
- Good Things.
- Tax-free death benefit to your family on your death.
- Can accumulate cash value that could be used before you die.
- You can keep the same insurance contract, with the same premium for your entire life.
- Less Good Things.
- Whole life insurance is not the cheapest way to get a death benefit. You will pay more premium for whole life insurance with the same death benefit as a similar term life insurance contract.
- Cash value accumulation is generally slower than the growth of “extra premiums” placed in a Roth IRA and invested in a basket of U.S. stocks.
- You plan to pay the insurance premiums for your entire life.
Retirement Savings Options
As you pursue the goal of saving for retirement, here is a common strategy.
- Max-out your work retirement plan.
- It’s low cost and easy through your payroll.
- You will often get matching money from your employer for any money you add to the account. Typically, you can get 4% of your gross pay added to your retirement account if you save enough. Ask your payroll department for the details at your work.
- You have the option to save into a Roth 401(k) account.
- Max savings in 2021 is $19,500 per person.
- People better than 50 years of age can add an additional $6,500 each year in 2021.
- Max out an individual retirement account.
- Each taxpayer can save $6,000 a year in 2021.
- If you are better than 50 years of age, you can add an additional $1,000 for tax year 2021.
- If you have only one person working outside the home in your family, you can still contribute to an IRA for each spouse each year.
- These accounts are very inexpensive to own.
- You should be able to own any investment you wish. If you put your money in a low-cost fund that owns the S&P 500 (the 500 largest companies in the U.S.) you can expect returns pretty close to the historical average return of 10.8% per year with dividends reinvested.
- Look for other retirement savings like whole life insurance.
- You are considering adding to this contract in the form of more premiums than you would spend on term insurance.
- You are considering this AFTER you have MAXED out work savings for both spouses and MAXED out IRAs for both spouses.
A Word About Life Insurance
Every family should have life insurance as part of their family financial plan. It’s an important tool and it can be extremely effective to help manage specific risks. But, I encourage you to consult with an experienced and well-trained financial planner as you evaluate your life insurance strategy. It might make sense to have whole life insurance in the mix, but it might not. . . It depends.
If you would like to talk with me about your financial plans and how you could used whole life insurance to reach your goals, follow this LINK to find a time to talk.
If you don’t want to talk with me, I urge you to seek some advice from an experienced and well trained CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not financial product manufacturers or distribution networks? That would be a fee-first advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.