Whole Life Insurance Policy vs Roth IRA: What’s the Difference?

Some clients and friends have been asking about the difference between whole life insurance and a Roth IRA. Usually, the question comes to me after a visit with a “financial planner” who works for a life insurance manufacturer. Gentle reminder, always be SUPER clear about how your “financial advisor” gets paid. Many financial professionals are employed by companies that make investment products. When you work for such a company, your first priority is to move product for the manufacturer. That’s your job.

This is just one BIG reason why I recommend getting your advice from a Certified Financial Planner™ professional who is a fiduciary (an advocate for the client) and who gets paid on by a fee. This arrangement assures that the recommendations you get are based on your goals and needs, not based on sales targets from the Home Office. Contact me if you would like to talk about this more. Just follow this LINK to connect with me.

Now, back to the question of what’s the difference.

What’s a Roth IRA?

A Roth IRA is a simple, cheap, easy way to save for retirement.

• You can open a Roth Individual Retirement Account at your favorite, brokerage firm, mutual fund company, bank or even on the Robinhood App.
• Often there is little or no administrative cost to open the account.
• You can own stocks, bonds, exchange traded funds (ETFs), mutual funds, even gold bullion.
• The IRS restricts contributions to a Roth IRA for tax year 2021.
  • Maximum of $6,000, plus an additional $1,000 if you are better than 50 years old.
  • If you are married and file taxes jointly, and you show more than $198,000 of income, your contribution will be reduced. If you show more than $208,000 you are NOT permitted to make a Roth IRA contribution.
• Your deposits can be removed at any time for any reason. No income tax. No penalty.
• You get no tax deduction for deposits, but if you follow these two the rules, all distributions will be free from income tax.
  1. You must wait until you are age 59.5 to remove growth AND
  2. You must have had a Roth IRA for at least five tax years.

What’s whole life insurance?

Whole life insurance is a permanent contract with an insurance company that promises to pay a death benefit to the beneficiary at the death of the insured. You pay premiums as long as you live and any extra money you pay will accumulate in “cash value” inside the contract. Your beneficiaries will receive the death benefit at your death.

• This is classic, traditional life insurance.
• The premium amount reflects annual expenses to provide the death benefit.
• Additional premiums can accumulate tax-free inside the contract.
• You can take out money from the accumulated cash value inside the policy.
  • This money comes to you tax free.
  • Withdrawals can reduce the death benefit.
• Traditional whole life policies pay interest (usually about the same as money market rates) on balances above the required premium amount.
  • Some other life insurance products offer investment options on the “extra” money.
  • Products like Universal Life, Variable Life, Indexed Universal Life and others each have different investment options, and expenses.
• There is no income limit on your ability to add money to a whole life insurance contract.
• In some cases, some permanent insurance contracts can be designed to create a SUPER ROTH that allows high income families to save large amounts of money for future use tax-free.
• In all cases, insurance policies carry fees and expenses that you must carefully evaluate. They can be significant.
  • First, your contract will reflect a sales charge in year one. This is the sales commission paid to the insurance agent. Often this is as much as half of your first-year premiums.
  • The sales charge also creates the surrender charges. This is a fee charged against your cash balance if the policy lapses within the first few years. This is how the insurance company makes sure to recover the commissions they paid out. The surrender charge generally decreases over time and then disappears. Typically, whole life policies will tend to break even around the tenth year of the policy.
  • Generally, the interest credit you get on money accumulating in a whole life cash account is less that the return you would earn on low-cost stock funds in a Roth IRA. So, there is a drag on your investment growth.

Key Differences and Main Points

Generally, the argument in favor of whole life insurance as a savings vehicle goes like this:

• You need life insurance, to protect your family against loss of your income, pay off the house, get the kids to college.
• You make too much money to saving into a Roth IRA.
• Your savings goals are larger than the $6,000 per person per year IRA limit.

But today, your work 401(k) probably offers a Roth 401(k) account. If so, you have an EXCELLENT alternative to life insurance.

• Roth 401(k) contributions can be matched by your employer, often at least 4% of your salary will be added to your retirement savings.
• Roth 401(k) limits are $19,500 per year plus $6,500 for those better than 50 years old.
• There is no income limit on Roth 401(k) contributions.
• Most 401(k) plans today are quite low-cost investment accounts.
• You do NOT get a tax deduction for adding to a Roth 401(k), but you also pay NO tax on any distributions from the Roth 401(k) account after you reach age 59.5.

I hope you see at this point that the decision between life insurance and IRAs as a retirement savings vehicle is complex. You would benefit from specific advice about your particular situation. It would be great to get that advice from an experienced, well-trained professional.

I’m happy to talk with you, just follow this LINK to connect with me.

If you would like 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 only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only 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-only, 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 only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice. Just follow this LINK to connect with me.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. 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.