Should I purchase an indexed universal life insurance plan or save money for retirement in a Roth IRA?
Should I purchase an indexed universal life insurance plan so I can take loans out later when I retire that are tax exempt, or save my money for retirement in a Roth IRA? Does the life insurance have higher fees in comparison to paying tax on the Roth IRA?
Hey there, you should max out the ROTH IRA first. If you can save more, then you could consider using the Life Insurance Option. This strategy has been dubbed the "Rich Person Roth" in this forbes column. Check it out for more inforation on who should and shouln't try and use life insurance to save for retirement.
Full disclosure, I am an investment guy, so I lean towards “buy term and invest the difference”. I started my financial career with a mutual life insurance company. They taught me from day one, that there was no better way to invest other than through life insurance vehicles. After a short period in life insurance sales, I transitioned to a wealth management firm and didn't look back.
You should go with the Roth IRA and this is why. The sales literature for a life insurance plan will focus on the protections of the index features and the tax advantages of the life insurance product. You mentioned paying tax on the Roth IRA, therefore I am assuming that you are talking about using post tax dollars to fund the Roth. The same would apply for funding a life insurance premium. So the real question is about comparing the accumulation and distribution of both investment vehicles.
The math matters when comparing these options. When considering a life insurance product, please think of the life insurance vehicle like a piece of investment real estate, but one that is mortgaged with your life. You pay down that mortgage over time, with fees of course (cost of administration and insurance) and when the mortgage is finally paid off, or you have accumulated enough equity in your policy, you are allowed to borrow back some of that equity with more fees (interest on the loan). The life insurance representative will tell you not to worry about the interest because the tax “advantages” will offset the fees. And if they are trained well, he or she will mention the death benefit will ultimately pay off the loans. You shouldn’t care about how the product ends because you will be dead anyway, right… Once you “look under the hood” the structure of the life insurance product will start to appear extremely similar to a reverse mortgage. Trying Googling "Reverse Mortgage" and see what the public thinks about that product.
Life insurance folks believe in their products, I give them that. In my opinion, life insurance is great for the beneficiary, not for the insured. Don’t misunderstand me, you should have life insurance if life insurance is needed, but it should not be used as an investment vehicle.
The Roth allows your contributions to grow tax deferred and if used properly can be distributed with out tax implications during your retirement years. It will give you more options and additional long term benefits. Of course tax laws could change, but as the current laws are written, I would place my bet on the Roth.
Hope this helps.
I would advise to AVOID a UL plan to save money for retirement. While there are still more questions to ask, typically your Roth IRA is going to be the more lucrative option. Highlights will include lower overall cost and more suitable investment options. An insurance sales employee will definitely sell you better than I ever would.
Here is a good rule of thumb to ask yourself. Do you have underlying investments on your car insurance policy? Then why should life insurance be any different (most of the time, but especially in your scenario).
I would advise to keep insurance and retirement savings in SEPARATE buckets as they fulfill different needs. When you comingle and start to increase complexity, you increase cost $$ as well.
At Aventine Financial Group, LLC or any other Fiduciary, Registered Investment Advisor, and Certified Financial Planner they would not be recommending a UL policy for this stated retirement goal.
Stick with a Warren Buffett high quality, dividend paying strategy inside your new Roth IRA and in the long term you will finish ahead. I would recommend reading The Intelligent Investor to get started.
Frank J. Fiumecaldo, CFP®
Founder & Partner
Aventine Financial Group, LLC
c 848.469.6950 | o 212.269.2512
The Roth IRA. And do it with a fee-only advisor who is not selling you products for commissions.
You ask about the fees on the indexed universal life "plan." Yes, there are fees, along with the insurance premiums. This is an insurance policy in the purest sense and a complex policy at that. Do you actually need life insurance? That would be the first requirement - a genuine need for life insurance. Depending upon your age and health, the premiums on these types of policies are not cheap. And the money that goes into the life insurance policy would have had taxes paid on it just like the money that goes into a Roth. Your last sentence makes me think you may have been told otherwise.
The strategy that has been suggested to you with the IUL would be more appropriate for someone who is of high net worth, with high income that precludes them from even qualifying for a Roth. The fact that the Roth remains an alternative for you means that you are not in this group. I applaud you for wanting to save. Do so in a way that does not require excessive spending. Good luck.
Dear Should I purchase an Indexed Universay Life Insurance Plan or save money for Retirement in a Roth IRA?
Two Excellent questions.
It is paramount to have clarity, focus and commitment with your financial goals and objectives as you approach retirement and to create a strategy to place your monies now for your retirment.
The INDEXED UNIVERSAL LIFE (IUL) allows you to allocate cash value amounts to either a fixed account or an equity index account comprised of a variety of well-known indexes (S&P 500 or the Nasdaq 100) for example providing tax-deferred cash accumulation for retirement while maintaining a death benefit.
The ROTH IRA is a Retirement Savings Account which allows the money you dedicate into a specific "basket of stocks" whether a mutual fund, an Index Account or ETF Account to grow tax-free. In return for no up-front tax break, money grows tax free. When you withdraw money at retirement, you pay no taxes, an incentive for long term growth.
First, learn about diverse Mutual Funds/ETF (exchange traded funds) which may comprise the fund families that can be chosen within the Roth Account or the Indexed Universal Life Insurance Plan. This knowledge can be had from a financial mentor with a drive to empower you to know about your money. The ability to invest in multiple companies at the same time, in the same sector within a single fund while seeking stable 1, 5 and 10 year returns with greater returns achieved long term with the goal to decrease risk over time while keeping costs to a minimum. This can be achieved with proper study, review, understanding and patience. Markets fluxuate, acknowledge this. There is no straight up in the financial markets.
Second, although I am not aware of your age, realize any investment in a ROTH IRA is a long term investment (period) as such is meant that any investment be made in superior companies poised to do well for the long term so you must research the best companies, industries so that you benefit from their good business acumen over time ...(Amazon, Apple, Microsoft).
Third, most IRA accounts will allow an individual to invest in select Mutual Funds. Find out exactly what are your options and from there take time to research individual funds, the stocks within the funds and the 1, 5 and 10 year returns generated in the funds of choice.
Fourth, be frugal and thereafter take funds otherwise spent and allocate to retirment funds either directly or allocate them from each pay check. Time goes by quickly and it is not uncommon to wake one day to say where did time and or where did the money go. Do not be one of these people.
Fifth, we are here to guide and to assist. We are passionate about empowering you and your roadmap to achieve financial independence via IRA accounts and any other investment vehicles to allow you to accomplish your dream of financial freedom.
Sixth, understand today what are your insurance needs and make certain to choose the best insurance protection for you, your family, your business and lifestyle. This may include paying off a home if you should pass suddenly, paying off a college education or two. Again the best advice is to be prepared.
You asked the question if you should purchase the indexed universal life insurance plan to allow you to take out loans later when you are retired that are tax exempt. If this is the only reason to purchase the Indexed Universal Life Plan than the answer would be no.
Alternatively, If you are planning to leave a benefit to a family, a loved one and you do not posess a life insurance plan at this time than perhaps the Indexed Universal Life Plan would be of value in your financial portfolio.
You asked the question does the life insurance have highter fees in comparison to paying tax on the Roth IRA. The better question is what will gain the best return on your investment over the long term whose return would exceed whatever fees would come from the life insurance or whatever tax would come due.
When you save and invest for retirement, what ever path you choose do not have as your goal an investment opportunity that provides an opportunity to take out a loan versus finding ways to maximize savings and minimize any and all loans you acquire. Diligent hard work ridding yourself of interest accounts will reap you long term benefits. Keep in mind that there are questions to ask, advisors to consult with and more to learn.
I applaud you for being "in control of your journey" asking such deliberate and probing questions. Continue this positive tragectory to achieve financial independence by ridding yourself of all loans making certain to keep this mindset. Be diligent and deliberate. It sounds as if you already are. A quest for knowledge and an understanding of the markets will reward you greatly.
All the very best to you. We are here to assist with your investment needs.
Jan Attard, MBA, RIA, Wealth Accumulation Specialist
Technical & Fundamental Market Analysis
J. Oliver Maxwell, LLC
Tele: # 925-876-1377