Whole Life Insurance Vs. Roth IRA | What’s the Difference?

Retiring early with sufficient financial backing is the dream of every hard-working adult. However, achieving this goal requires decades of financial planning, consistent saving, and progressive goal-setting. What you do now and in the following years is consequential to your success.

Setting up and investing in life insurance can help you take a significant step towards financial freedom. Living your best retirement years is at arm’s length with a fully-matured life insurance policy. When choosing an insurance policy for retirement, many people choose between whole life insurance and a Roth IRA.

Let’s analyze both policies and identify which is best for you.

What is a Roth IRA?

Roth IRA is a retirement savings account that will offer tax-free growth and tax-free withdrawals in retirement after you turn 59 ½ years old, assuming you opened your account five years prior. The IRS Internal Revenue Service determine the amount you can contribute to your Roth IRA account and restricts the type of income source you can take your contributions.

According to the federal agency, members may only contribute money from earned income, such as wages, salaries, tips, bonuses, and other forms of taxable compensation. If you earn interest or dividends from investments, you cannot use that money to contribute to a Roth IRA.

What is Whole Life Insurance?

A whole life insurance policy is a type of permanent life insurance that provides death benefits and cash value accumulation. The cash value grows tax-deferred, meaning you don’t have to pay taxes on the money as it grows.

With a whole life insurance policy, you make monthly premium payments for the rest of your life. If you keep up with the payments, the death benefit will be paid out to your beneficiaries tax-free after your death.

Life Insurance Vs. Roth IRA: Which One is Better?

Choosing between a Roth IRA and whole life insurance can be a difficult decision. Both options have their own set of pros and cons that you need to consider before making a choice.

Let’s explore these differences and help you set up the best policy for you.

Returns

When it comes to returns, Whole Life Insurance and Roth IRAs offer two very different options. Whole Life Insurance offers a guaranteed return on the premiums paid into the policy, typically ranging from 3-4%. This guaranteed return can provide security to those looking for a safe investment with minimal risk. On the other hand, Roth IRAs offer an array of investment options such as stocks, bonds, mutual funds, and ETFs. These investments have the potential to offer higher returns than whole life insurance, but they also come with a greater risk of losing money.

Flexibility

Roth IRA accounts are more flexible than Whole Life Insurance when it comes to making changes. With a Roth IRA, you can easily switch investments and make changes to your contributions whenever you want. With Whole Life Insurance, the policy is locked into one rate and cannot be changed or altered.

Contribution Limits

The IRS dictates the contributions you can make to a Roth IRA. As of 2022, the agency allows policyholders to contribute a maximum of $6,000 per year for members under 50 years old and $7,000 for members 50 years and older. There are further limitations depending on the individual’s marital status and income level. 

On the other hand, there are no contribution limits with whole life insurance. You can make contributions depending on how much you can afford and how quickly you want to grow your cash value.

Eligibility

Because a government agency regulates Roth IRAs, the eligibility requirement is more stringent than for whole life insurance. According to the IRS, only those who have a regular stream of taxable income can open and contribute to a Roth IRA account. This means if your sole source of income is from investments, you are not eligible to open a Roth IRA.

With whole life insurance, anyone can be eligible for coverage as long as they can consistently pay their premiums. Some companies may impose eligibility rules but are not as restrictive as the IRS.

Investments and Taxes

A Roth IRA offers tax-free growth and withdrawals, while whole life insurance provides tax-deferred cash value growth. This is a crucial difference when it comes to taking out your money.

With a Roth IRA, once you are 59 ½ years old, you are able to withdraw funds whenever without paying penalties or taxes. Withdrawing your earnings before you reach 59 ½ years old will incur heavy penalties.

With whole life insurance, you can access your cash value through policy loans. This allows you access to as much money as needed while avoiding taxes penalties. Regardless, if you surrender your policy, you will have to pay taxes on the earnings.

Estate Taxes

Roth IRAs are subject to estate taxes, while whole life insurance is usually not. Your beneficiaries will have to pay taxes on the money they inherit from your Roth IRA account.

With whole life insurance, your death benefit will be paid out tax-free to your beneficiaries if you set it up as an irrevocable life insurance trust.

Final Thoughts

Preparing for your retirement is not an overnight process. If you plan to retire early, you need to start saving and working out a strategy as soon as possible.

Remember, whole life insurance may be a good option when looking for the freedom of an investment with tax-deferred growth and the ability to access your cash value.

Speaking with an experienced and knowledgeable financial consultant is the best way to solidify your retirement strategy. They can help you understand each account’s pros and cons and ensure you are on track to reach your retirement goals.

For more information on life insurance, get in touch with us here at Art Life Insurance Agency and set up a meeting with one of our financial specialists.

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