Is life insurance better for retirement than a Roth IRA?

Although you can consider purchasing life insurance for retirement savings, it might not be your best option if your objective is to build a nest egg. However, it’s an excellent choice if you already have a Roth IRA and have maximized your contributions for the year.

What is the difference between life insurance and a Roth IRA?

Both are solid investment options, but there are essential differences between life insurance vs. a Roth IRA. Life insurance’s primary advantage is providing a death benefit to your beneficiaries after you die. Although some policy types include a cash value component, it’s not guaranteed and may yield lower returns. A Roth IRA’s primary focus is to establish retirement funds. Although you can only contribute a maximum of $6,000 a year ($7,000 if you’re over 50), your money grows tax-free. Once you reach 59 ½, you can withdraw from your account without worrying about income tax.

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

Life insurance and a Roth IRA both help you make smart financial plans for the future and ensure you have savings set aside. Life insurance is great for estate planning, while a Roth IRA is best for retirement savings.

By Mark Fitzpatrick, Content Director

Updated: Nov 13, 2023

Edited by

Amy Wilder

4 Expert Contributions

Preparing 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.

What Is the Difference Between Roth IRAs & Life Insurance?
Benefits of a Roth IRA vs. Life Insurance
Which One Should You Get: Roth IRA or Life Insurance?
Frequently Asked Questions

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

Roth IRA

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

Life Insurance

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

DO YOU STILL NEED LIFE INSURANCE IF YOU HAVE A ROTH IRA?

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 Potential	If your main objective is to save for retirement, a Roth IRA may be the better option. It's structured to cater specifically to those who want to ensure they have savings by the time they retire. You're more likely to get higher returns with a Roth IRA.	If you are preparing for retirement, the life insurance plans that can help you achieve your financial goal are permanent life insurance types. Term life plans are typically more popular but do not include a cash value component. Returns for cash value life insurance are usually lower than other investments. Returns are not always guaranteed, which means you could lose funds when purchasing life insurance for retirement savings.
Death Benefit	Setting up a Roth IRA allows you to build a nest egg, and if you start early enough, it can reach a sizeable amount by the time you retire. Your proceeds are primarily for your use. Although it does not pay out a death benefit, you can arrange for someone to inherit the balance of your Roth IRA when you die.	Life insurance policies are death benefit-focused. People usually purchase a plan to ensure their loved ones remain financially secure if and when the policyholder dies, as long as the policy is still active. The payment amount depends on the coverage you select when you purchase the plan.
Withdrawals	You can only use earned income as contributions to your Roth IRA, which means contributions are after-tax dollars. Although your contributions aren't tax deductible, your money grows tax-free. When you begin withdrawing your funds, distributions remain tax-free and penalty-free after you turn 59 1/2. However, if you receive non-qualified distributions, they are still tax-free, but a 10% penalty applies.	You can often take money out of your life insurance policy if it includes a cash value component. The amount is tax-free unless it exceeds what you've established as cash value. Since your contributions come from a portion of your premium payment, it may take longer for your funds to accrue — typically two to five years. Remember, withdrawing everything cancels your insurance, so ensure there's money left if you want to keep the policy.

MONEYGEEK EXPERT TIP

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 Ensuring you remain financially comfortable in your golden years.	Roth IRA A Roth IRA has better earning potential. A Roth IRA is a retirement plan and its structure allows your money to grow more rapidly. You can maximize your Roth IRA if you open it early and contribute the maximum amount each year.
College Fund Prevent your child from incurring student debt.	Life Insurance To ensure you don't pay the 10% penalty when withdrawing from your Roth IRA, you must be 59 1/2 or older. Taking money out of your life insurance cash value has different parameters. You'll likely be in your 40s or 50s when your child enters college, so life insurance may be a better option.
Estate Planning Ensure your loved ones receive financial support if you die.	Life Insurance Although you can direct your Roth IRA to specific beneficiaries, it does not pay a death benefit. Your loved ones can claim your life insurance if you die and your policy is active. The money could take care of final expenses plus tide beneficiaries over for some time.
Long-Term Care Coverage for long-term medical treatments.	Life Insurance Although the primary purpose of life insurance is to ensure your loved ones are financially stable if you die, you can also sometimes use it while you're still alive. Adding a long-term care rider to your policy allows you to access a portion or your entire death benefit.

MONEYGEEK EXPERT TIP

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.

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?

Amy Mitchell, CFA, CFP®

Senior Wealth Advisor at Hemington Wealth Management

Chuck Czajka

CEO of Macro Money Concepts

Jeremy Keil

Financial Advisor at Keil Financial Partners

Bryan Miranda

Director of Insurance and Investment Advisor Representative at Gerber Kawasaki

Elliott Appel

CFP®, CLU®, RLP® at Kindness Financial Planning

Derek Munchow

Founder at Augustus Wealth

Chigozie Andy Ngwaba

Assistant Professor of Economics and Director of the Actuarial Science Business Program at Bradley University

John Lopez

Senior Professor of Practice at C.T. Bauer College of Business at the University of Houston

Clint Haynes

President, Certified Financial Planner® at NextGen Wealth

About Mark Fitzpatrick

Mark Fitzpatrick is a senior content director at MoneyGeek with over five years of experience analyzing the insurance market, conducting original research and creating content that can be personalized for every buyer. He has been quoted on insurance topics in several publications, including CNBC, NBC News and Mashable.

Mark earned a master’s degree in Economics and International Relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his economics and insurance knowledge to bring transparency around financial topics and help others feel confident in their money moves.

sources

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