Life Insurance vs. Roth IRA: Which One Is Better for Retirement?

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, Content DirectorPreparing early for retirement and estate planning is an excellent idea. One common decision to make is choosing a financial product that allows you to build a nest egg. And that sometimes boils down to a Roth IRA or life insurance.
A Roth IRA is usually better for a retirement plan because that's its purpose. Returns are likely to be higher, so if having retirement savings is your main objective, it's likely your best bet.
A life insurance policy is the better choice for estate planning because it focuses on providing death benefits to your loved ones after you die. Some types include a savings component, but the returns are usually lower and, as with variable life insurance, aren't guaranteed.
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What Is the Difference Between Roth IRAs & Life Insurance?
If you're considering life insurance vs. a Roth IRA for your retirement savings, it's essential to understand their differences. While these are different financial products, it may be difficult to delineate between them without context.
Their differences lie in the following areas:
- Contributions
- Benefits
- Earnings
- Distributions
Roth IRA vs. Life Insurance
- Does not consider your health when you open an account
- You can only use earned income for your contributions
- Uses after-tax dollars as contributions
- The IRA contribution limits are up to $6,000 for 2022 ($7,000 for those 50 and older).
- Allows your money to grow tax-free
- No income taxes
- No withdrawal taxes
- No Required Minimum Distributions (RDMs)
- No death benefit
- Considers your health when you purchase a policy, so those with medical conditions may have more expensive premiums
- No restrictions on the type of income you can use to pay for your premium
- Offers a death benefit
- Has a cash value component (for permanent life insurance)
- Allows your money to earn tax-deferred
- Requires you to pay income tax on withdrawals exceeding your cash value base amount
Having a nest egg by the time you retire is one consideration. Having peace of mind and knowing your loved ones will receive financial support if and when you die is another.
Remember, these two offer different benefits. You may want to purchase life insurance as well as invest in a Roth IRA.
Life insurance can supplement your retirement savings, so life insurance can be an advantage even if you already have a Roth IRA.
Comparison of Contributions for a Roth IRA vs. Life Insurance
Understanding how you put money into these potential retirement plan options may give you a better idea of what's more advantageous for you.
Permanent life insurance, whether whole life or universal life, has two components — a death benefit and a cash value. Each time you pay your premium, a portion goes into your investment. In the long run, life insurance may be more expensive than other investment types.
The section below compares contributions for life insurance vs. Roth IRA.
Roth IRA
Minimum Contribution: There is no minimum contribution for a Roth IRA. You can open an account if your income meets eligibility requirements. However, despite not having minimum contribution limits, there is a cap on how much you can put in per year.
Maximum Contribution: Contributions for a Roth IRA come from your earned income. You use after-tax dollars for your account and can put in as much as $6,000 annually. If you are 50 or older, you can add a catch-up contribution of up to $1,000.
Contribution Frequency: There is no schedule for when you must make your contributions — you can make them any time during the year. However, you must ensure you complete these by your income tax return's due date, especially if you plan to max out your contributions.
Life Insurance
Minimum Contribution: Your contribution to your life insurance's cash value comes from your premium. Each time you make a payment, part of that goes to your cash value, while the remainder goes to your death benefit. However, there is no standard percentage for the computation.
Maximum Contribution: You can overfund your life insurance, which means you pay more than your policy requires. You can increase your contributions to your cash value this way.
Contribution Frequency: Because your life insurance cash value contributions come from your premium payments, how often you put money in your cash value depends on your payment schedule.
Benefits of a Roth IRA vs. Life Insurance
Although both investment tools provide benefits, what you get from a Roth IRA vs. life insurance varies. You'll likely take advantage of three benefits: how your money earns, what your beneficiaries get and withdrawals.
Remember, all three are possible for life insurance and a Roth IRA, but how each works is different. Refer to the table below to see how the benefits differ between a Roth IRA and life insurance.
Roth IRA vs. Life Insurance Benefits Comparison
Benefit | Roth IRA | Life Insurance |
---|---|---|
Savings | If your main objective is to save for | If you are preparing for retirement, Returns for cash value life |
Death Benefit | Setting up a Roth IRA allows you to | Life insurance policies are death |
Withdrawals | You can only use earned income | You can often take money out of |
Because life insurance offers a death benefit and a Roth IRA doesn't, some might think the former is an automatic upgrade. Most also equate this to being a better option for establishing retirement savings.
However, that's not necessarily true. A Roth IRA might still be the better choice, especially if your objective is to build a nest egg for retirement.
Which One Should You Get: Roth IRA or Life Insurance?
Whether life insurance or a Roth IRA is the better choice depends on your financial goals. Knowing whether your priority is saving to retire or leaving financial support for your loved ones may lead you toward the best option.
Roth IRA vs. Life Insurance Comparison by Goal
Goal | Best Option |
---|---|
Retirement Fund | Roth IRA |
College Fund | Life Insurance |
Estate Planning | Life Insurance |
Long-Term Care | Life Insurance |
Most people rely on employer-sponsored retirement plans, such as a 401(k). However, it's essential to know that there are more options to prepare for retirement and a Roth IRA is one of them.
Opening a Roth IRA may seem overwhelming. There are a few things to keep in mind, but it doesn't have to be complicated. Learning the basics of a Roth IRA can go a long way to help you decide whether it's the direction you want to take in preparation for your retirement.
Similarly, you can get multiple benefits from a life insurance policy. However, your unique needs and preferences determine the best life insurance option for you.
It's wise to explore your options before deciding on an option or a provider. Comparing several companies and their coverages can help you find the best deal.
Compare Life Insurance Rates
Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions
Where you invest your money can make a big difference as you prepare for retirement. If you’re on the fence between life insurance or a Roth IRA, read through some commonly asked questions to help determine your best option.
Expert Advice on Life Insurance vs Roth IRA for Retirement
- Our research indicates some consumers are considering whether to fund a Roth IRA or permanent life insurance as a means to retirement planning. Why might they be making this comparison?
- For the typical consumer who’s not eligible for a Roth IRA, but isn’t ultra wealthy, how would you recommend they employ these products? Would you recommend one over the other or some usage of both?
- How do the contributions and contribution limits for a Roth IRA compare to premium payments for life insurance?
- Recently some social media accounts have touted the value of insurance as a way to save for and fund retirement. Is this just marketing?
About Mark Fitzpatrick

sources
- IRS. "Retirement Topics — IRA Contribution Limits." Accessed October 12, 2022.