Life Insurance or 401(k): Which one makes sense for retirement? | SelectQuote (2024)

FAQs

Life Insurance or 401(k): Which one makes sense for retirement? | SelectQuote? ›

Some life insurance policies, like a life insurance retirement plan (LIRP), can also help you save for retirement. However, a 401(k) typically makes more sense as your primary retirement income because it's more affordable and offers better returns than a LIRP or other types of life insurance.

What's the best way to save for retirement? A 401(k) is always a better choice than a life insurance policy. Even if you would benefit from a LIRP, you should maximize contributions to your 401(k) and other retirement accounts before investing in life insurance alternatives.

Whole life can be a good supplement for your retirement plans, but as noted, it should not be a stand-alone option. Compared to typical retirement investments (or even real estate), whole life insurance policies are insulated from market risk – which is good – but also tend to offer lower returns over time.

The amount of cash that's in the fund when you retire is what you will receive as a pension. Thus, there is no guarantee that you will receive anything from this defined contribution plan. The fund may lose all (or a substantial part) of its value in the markets just as you're ready to start taking distributions.

Affordable life insurance for seniors is a must for older people who are often on a fixed income. Not only can it help cover funeral and end-of-life expenses, but it can help replace lost income for surviving dependents.

You may already have a pretty good idea whether you need ongoing coverage. If you retire and no longer work to make ends meet, you probably don't need life insurance in retirement. One exception is if you expect to owe estate taxes, in which case life insurance can be a good solution to cover the bill.

Annuities offer better investment and income benefits while you're alive. Your return is higher because you aren't also paying for life insurance coverage. Instead, all the money is put toward an investment. Annuities also offer more income options, like guaranteed income for life.

There isn't any age cut-off that makes life insurance no longer worth it; it's all about your personal situation. That being said, it is often worth having life insurance after 65 if you have dependents who rely on you financially.

That's why Orman says it's best to set up a term life insurance policy that will remain in effect until your children reach early adulthood. In fact, in a recent podcast episode, Orman suggested getting life insurance that will last until your kids reach age 23 or 24.

Cons of life insurance

One disadvantage of life insurance is that the older you are, the more you'll pay for a policy. This is because you're more likely to pass away during the policy period than a younger policyholder and will, in turn, cost the life insurance company more money.

Where is the safest place to put your retirement money? ›

The overall retirement savings for the wealthiest 1% stand at approximately $2.3 million. When considering a broader definition of retirement assets, the figure escalates to $5 million.

Life insurance may not be worth if you have no dependents, if you have a tight budget, or if you have other plans for providing for them after your death.

Thankfully, it's never too late to purchase life insurance. Buying life insurance from certain insurers may be difficult depending on your age and health, but it's not impossible.

A 401(k) will help provide for your family while you're alive, and life insurance will help provide for your family after death. Both options will help provide you with the financial peace of mind that your family will be taken care of after you're gone.

If you want the best possible selection of investments, then an IRA – especially at an online brokerage – will offer you the most options. You'll have the full suite of assets on offer at the institution: stocks, bonds, CDs, mutual funds, ETFs and more.

Another option to consider is a health savings account (HSA). If you have an HSA-eligible health plan, these accounts offer a number of benefits, including a tax deduction, tax-free growth potential, and tax-free withdrawals to pay for qualified medical expenses—either now or in retirement.

401(k) Disadvantages

Withdrawals from your traditional 401(k) are taxed at your prevailing income-tax rate when you take money out. There are restrictions on how and when you can withdraw money from the account, as well.

While having a savings account is definitely a wise financial decision, it should not be seen as a substitute for life insurance. Life insurance products offer the protection and security of your loved ones in case of your untimely death. It would help if you also considered the tax implications.