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 to plan for retirement. Why might they be making this comparison?
If someone is considering funding permanent life insurance over a Roth IRA, it's probably because they're being sold on it. In my experience as a fee-only advisor (and someone who previously had an insurance license) without an incentive to sell a product, I rarely find that permanent insurance makes sense for the vast majority of people. Unless you have an estate tax liability (very few people do) or own an illiquid business, most would be much better served by term insurance and investing the difference using accounts like a Roth IRA. The fact that this is even a question is silly because if you are able to contribute to a Roth IRA directly, you're not a high enough earner to benefit from any tax deferral a complex permanent insurance policy may provide.
How do the contributions and contribution limits for a Roth IRA compare to premium payments for life insurance?
For 2024, phaseouts for direct Roth IRA contributions start at $146k MAGI (single filer) and $230k MAGI (married filing jointly). You can make up to a $7k direct Roth contribution if you're below those thresholds. However, there are still ways to make backdoor Roth IRA contributions even if you exceed the phaseout limits. Premium payments for permanent life insurance will depend on the specific product and coverage amount. Again, I would highly recommend maxing Roth IRA contributions (and many other things) before considering funding a permanent life insurance policy.
Recently some social media accounts have touted the value of insurance as a way to save for and fund retirement. Is this just marketing?
Yes, I'd say the people marketing these products have a substantial conflict of interest as they get paid via commission for selling these products. A true advice professional would examine the individual's situation and personal goals and would not have a one-size-fits-all solution for retirement planning. I highly recommend following Andy Panko on LinkedIn to understand the tactics of IUL salespeople in particular.
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?
Keep in mind that anyone can contribute to a traditional IRA; it's just that their contribution may not be deductible if their income exceeds the phaseout amount. However, if they don't have any pre-tax money existing in their IRA, they can convert this money to a Roth IRA (this is known as a backdoor Roth IRA contribution). There are many different accounts to consider funding before permanent life insurance, such as a 401(k), a health savings account and even a taxable brokerage account. I would highly recommend keeping insurance and investments separate. Combining the two is a recipe for complexity and hidden fees.
