Life Insurance vs Roth IRA: Best Option for Retirement

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It’s a better idea to plan earlier for your retirement. When thinking about where to set aside money for retirement, you have to compare your options carefully. You are going from one main income source to various smaller income sources while getting retired. Certainly, you want to secure your family’s financial condition in case of your unexpected death. What would be the best option for you? Well! you can compare Life Insurance vs Roth IRA for better planning.

During financial planning, most of us find ourselves confused between selecting a Roth IRA and a Life Insurance plan. Well! Both are potent, offering exciting benefits, and meeting various financial goals. However, understanding the distinctions between these two options is necessary. In this blog post, we will clear the chaos surrounding the “Life Insurance vs Roth IRA” along with some arising questions about this topic.

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Life Insurance vs Roth IRA: Understanding the Difference 

What is a Life Insurance Plan?

A life insurance policy is a contract between the insured and the insurer in which the insurer promises to pay a lump sum amount to the designated beneficiary after the death of the policyholder. The death benefit (lump sum amount) is paid in exchange for the premiums the insured has paid during his life. However, it comes with two main types: term life insurance (giving coverage for a specific time) and permanent life insurance (lifetime coverage).

What is a Roth IRA? 

A Roth IRA (Individual Retirement Account) is a unique account where an individual has to pay taxes on money going into his account, meanwhile, all future withdrawals will be tax-free. It is an amazing option for those individuals looking for long-term retirement savings as the growth is tax-free. Another feature that makes Roth IRA distinctive is that it isn’t obliged to withdraw at a certain age, unlike many other retirement accounts.

The core difference between these two terms is life insurance is designed to save your family from financial instability after your demise, and a Roth IRA provides financial security in retirement. Moreover, life insurance plans come with a cash value component that may grow with time, offering another investment aspect for the policyholder.

What is the Difference between Life Insurance vs  Roth IRA? 

A General Review of Life Insurance vs Roth IRA

Life Insurance 

  • Consider your health conditions while getting a policy, any pre-existing condition results in more expensive premiums.
  • No restrictions on the income type you use to pay the premiums.
  • Offers a death benefit (lump sum amount).
  • Permanent life insurance has a cash value component.
  • The death benefit will be tax-free.
  • You have to pay income tax if withdrawals exceed the cash value base amount.

Roth IRA 

  • Don’t consider your health conditions while opening an account.
  • Only earned income can be used for contributions.
  • No income taxes.
  • No death benefit.
  • No Required Minimum Distributions (RDMs).
  • Uses after-tax dollars as a contribution.
  • No withdrawal taxes.
  • Your money will grow tax-free.
  • Contribution limits are up to $6,000.

Well! Here is a closer consideration for you on how life insurance can differ from a Roth IRA:

  • Eligibility

Life insurance plans don’t have any income limitation just like a Roth IRA. On the other hand, a married couple with an income of $203,000 ( 2019) or above can’t file or contribute to a Roth IRA.

  • Volatility 

Life insurance plans never decrease in value and are not subject to any market volatility. However, Roth IRA contributions are subjected to market risk based on your selected investment options. If the markets are down, Roth IRA values could also go down.

  • Contributions 

Roth IRA annual contribution limit is $6,000 under 50 and if you are 50 or above it would be $7,000. Meanwhile, life insurance plans are designed to accept much more than $7,000 in terms of annual premiums that help you to build pretty much savings before your retirement.

  • Distributions 

Life insurance has a cash value component that allows access to your available plan values whenever you need them without any penalty. The Roth IRA has various restrictions on how and when you can get money out of your account.

  • Protection 

Life insurance gives a tax-free death benefit much bigger than the size of the annual premium amount. It is an important feature of insurance plans that gives financial protection during a hard time for your family.

Contribution Comparison for Life Insurance vs Roth IRA 

Having an idea of how you add money into these retirement plans would make you understand what a more beneficial option is for you. Life insurance (permanent) whether whole life or universal has two components: a death benefit and a cash value. Each time you pay a premium, an amount will go into your investment. But in the long run, life insurance can be more expensive than any other investment option.

Here we will compare contributions for Life Insurance vs Roth IRA.

1- Life Insurance 

Minimum Contribution: In a life insurance plan, your contribution comes directly from your premiums. A part of the paid premium will go to the cash value while the remaining will go to the death benefit. However, there is no standard percentage available for the computation.

Maximum Contribution: You can overfund your life insurance plan, meaning you can pay more than your monthly or annual premium amount. In this way, you enhance your cash value contribution.

Contribution Range: As your cash value contributions come from the paid premiums, how often you put the amount in your cash value will be based on the payment schedule.

2- Roth IRA 

Minimum Contribution: For a Roth IRA, there is no minimum contribution. You can easily open an account if your income meets the eligibility criteria. Despite having no minimum contribution limits, there is a limit on how much you can put in your account per year.

Maximum Contribution: Contributions in this term come from your earned income. You can use after-tax dollars for your account and put in as much as $6,000 annually. However, if you are older or above 50, you can add $7,000.

Contribution Range: No schedule for when you have to make your contributions as you can make them any time of the year. But if you plan to max out your contributions you have to make sure that you complete the contributions before the due date of your income tax return.

Do you need a life insurance plan when you already have a Roth IRA? 

Having financial security by the time of your retirement is one consideration. Another one is the mental satisfaction that comes from knowing that your loved ones are protected financially if and when you die.

Remember that both life insurance and Roth IRAs provide different advantages so you may want to buy life insurance as well as invest in a Roth IRA. A life insurance policy will add up your retirement savings, so it will be an advantageous option even if you have a Roth IRA.

Can you contribute to both the Roth IRA and Life Insurance Plan? 

Yes, you can contribute to both a Roth IRA and a life insurance plan without affecting each other’s contributions. However, it is important to consider your financial goals, risk tolerance, and time frame before deciding how much you contribute to each option. Also, consider applicable guidelines and regulations settled by the IRS while contributing to the Roth IRA.