Protect Your Family: Roth IRA vs Life Insurance

Many people are now using the Roth IRA for their retirement portfolios. Although people have long invested in whole life insurance to provide for their loved ones in the future, a Roth IRA may now be the better choice. Here are a few things to consider about both as you plan for the future.

Whole Life Insurance

Whole life insurance is designed to build a cash value as you go. It also provides you with a lump-sum death benefit that can be a substantial amount. Years ago, this was considered the gold standard for preparing for the future. If you died suddenly, your family would be taken care of with a large payout. If you lived for many years, you had the cash value to take out and use as you wished. You could also use this money without paying taxes on it.

While this strategy can work, it is not very efficient. For one thing, you are not going to get as much money as you put into the policy. You pay premiums every year, and part of that money goes towards the cash value. Part of it goes towards the administration of the policy, and part goes towards the death benefit. On top of that, you will most likely pay several fees to the administrator of the policy as well. There will be transaction fees, maintenance fees and other types of fees. This can really eat into the benefits that you receive. If you end up living a long life, you will have paid a large percentage of your money for nothing. The cash value will be quite a bit less than you have paid in over the years.

Roth IRA

As with a whole life insurance policy, the money that you withdraw from a Roth IRA is not subject to income tax. A Roth IRA is a retirement account that you set up with a financial institution and fund with after-tax dollars. Then you have the ability to invest the money into many different investments. The money is allowed to grow tax-free in the account. Once you reach the age of 59 1/2, you can withdraw the money with no tax penalty. 

With the Roth IRA, all of the money that you put into the account can be taken back out. As long as you do not lose money with your investments over the years, you will be able to get the entire amount back. As long as you choose good investments, you could potentially net a great return on your money as well. 

Another advantage of the Roth IRA is that you have complete control over the investments. With whole life insurance, someone else is taking your money and investing it.

You can set up the account to pay a regular distribution to your beneficiary in the event of your death,with no tax liability. When you use this method, you will most likely want to also get a term life insurance policy to protect your family if you should suddenly die. With this policy, you will not pay nearly as much for coverage, and you will be able to invest the rest of your money into the Roth IRA. 

blog comments powered by Disqus