Benefits of Universal Life Insurance (ULI) Over a 401(k)
Various financial institutions offer many products to help people fund such long-term savings goals as retirement. Many employers offer a 401k plan to allow employees to take advantage of tax-deferred contributions and growth. Alternatively, a universal life insurance policy provides a tax-advantaged way to build wealth and protect families with a death benefit. Compare the benefits of universal life insurance vs. a 401k for employees and employers.
Compare Universal Life Insurance Vs. 401K Plans
To compare ULI and 401K plans, take a moment to understand the basics of both products:
What is a 401K?
A 401(k) lets employees make tax-deductible contributions and enjoy tax-deferred growth. Some employers will match part of the employee’s contributions. When employees retire, they generally pay taxes on withdrawals as ordinary income. The IRS imposes limits on contributions. Typically, 401(k) accounts let owners invest in various securities, assuming the market risk of those financial products.
What is ULI?
Indexed universal life describes a kind of permanent life insurance. So long as the insurer receives the required premiums, the policy remains in force for a lifetime. ULI offers two essential features:
- As with other life insurance, beneficiaries can claim a death benefit if the insured person passes away. Typically, the beneficiaries do not need to pay tax on this benefit.
- Like other permanent life policies, a ULI policy also allocates part of the premiums to a cash account. Insurers will peg the rate of return on this account to a financial index, like the S&P 500.
The cash account will move upwards when its index rises. Since these are fixed-index policies, unlike variable life, the policy will also have a guaranteed minimum, so the money in the cash account will not decrease if the index declines. Thus, owning ULI does not risk market losses, like variable products or typical securities.
Policy owners will also tax-deferred gains within their cash account. They may also enjoy such other financial and tax advantages as the ability to borrow against their tax account instead of withdrawing funds. In that way, universal life insurance can work as both life insurance and a growing asset.
Advantages of Indexed Universal Life Insurance Over a 401(k)
Explore some highlights of the benefits that universal life insurance can offer:
- Universal life insurance policies don’t impose limits on the size of policies, so they may provide a way for employees to save more if they have already maxed out the IRS limits for other tax-advantaged financial products.
- The life insurance contract will typically offer a guaranteed rate of return if the market declines, unlike a 401(k).
- The IRS may impose penalties on early 401(k) withdrawals before the account owner turns 59 1/2. In contrast, life insurance has no age-related restrictions on borrowing or withdrawing from its cash account.
- Universal life insurance includes a death benefit, and a 401(k) does not.
Employers can offer their employees group universal life insurance policies as an attractive benefit that provides both life insurance and retirement savings in one package. The employer can choose to pay part or all of the premium or let employees pay the entire premium.
Universal life insurance plans can help attract and retain quality employees, plus these policies may offer benefits over traditional retirement plans. Contact us to discuss how universal life insurance will benefit your business.