Graphic illustration of a chicken using their wings to cover two yellow eggs, symbolizing the idea of 401k vs life insurance
Insurance 101

401k vs life insurance—which is better?

Insurance 101

401k vs life insurance—which is better?

When it comes to these investment options it doesn’t have to be “either or.”

It’s called a 401k, but it doesn’t have to be a race to the finish line. And when it comes to investing, savings and the future, you do have some time to really think and consider your options. But you may be wondering if you should use an employer-based 401k or an insurer-based life insurance policy as the main meat of your investment plan. There’ve been great matchups before—De Niro vs Pacino, Bette vs Joan, dogs vs cats. Today, we’re pitting these two baddies, 401k vs life insurance against each other to see which investment pathway you should choose.

  1. Differences between a 401k and life insurance
  2. 401k vs life insurance
  3. So which one would work better for you?

Differences between a 401k and life insurance

Before we can discuss whether or not one rocks harder than the other, we need to explore what separates a 401k and life insurance policy. For the purposes of this breakdown, we’ll be referring to permanent types of life insurance, since term life isn’t typically utilized for investment.

What is a 401k

A 401k is a retirement savings and investing plan that employers can offer that allows tax breaks to employees. The name itself comes from the same-titled section of the tax code, subsection 401(k) (neat right?). With a 401k, funds are allocated from an employee’s paychecks. Those funds are then invested in options chosen by the employee from a list of investment opportunities provided by the employer. Subsequent tax breaks can either happen when the money has been deposited, or when you withdraw it in retirement. And employers often match contributions made to your 401k (up to a certain threshold).

What is life insurance

There are multiple kinds of life insurance. For this comparison, we’ll be generally referring to permanent life insurance policy-types, rather than term life. Overall, life insurance is a contract between the policyholder and the insurance company. This contract says that the insurer will pay a lump sum to named beneficiaries should the policyholder die during the contract period. This money will be paid out in exchange for premiums paid during said contract.

Permanent life insurance policies often come with something called cash-value. It’s an investment-like savings account that accrues interest and other gains that are tax-deferred. With enough cash-value grown, policyholders can even borrow against their policy’s cash-value.

401k vs life insurance

When it comes to investment, both have their positives (and some drawbacks). 401ks have multiple options for tax benefits as well as financial safeguards, among other benefits. And you don’t typically pay taxes on the money, provided you wait until retirement to withdraw funds (earliest is age 59.5).

Meanwhile, permanent life insurance cash-value allows these policies to be used as a form of investment that can be borrowed against once that cash-value grows. And permanent policies have additional features depending on which type you go with.

However, not everything is looking peachy-keen for permanent life insurance as an investment vehicle. Some permanent policies can take some time to build up that sweet sweet cash value. Some may even take decades before you have a substantial amount of value built up in the policy.

Comparison of permanent life insurance and 401ks  Permanent life insurance:  Financial support for loved ones after your death  You pay monthly premiums  Average year returns is 1.5% to 3.5%  401k:  Provides income in your retirement years  Money is deducted from paycheck  Average yearly return is 5% to 8%
Finder article “Life insurance vs. 401(k),” Jan 2021.


So which one would work better for you?

Does it all come down to life insurance OR 401k? That depends on your needs and situation. For example, if you have an employer 401k plan available to you, you may not need a permanent life insurance policy on top of that. They’re not necessarily redundant, but with a permanent life insurance policy, you could be paying those regular premium costs for years before the policy’s cash-value breaks even.

Instead, some experts suggest that if you have access to a 401k plan through your job, it might be a better option to add a term life insurance policy. As opposed to a permanent policy, term life can still provide peace of mind while offering great coverage. Plus, term life policies are typically cheaper than permanent options. And you can select a term length that works best for you. Do you need life insurance if you have a 401k? Yeah, even if you’re not using a policy for investment, having a life insurance policy is still beneficial to an overall protection plan.

Ultimately, it all depends on your needs. And how best you want to use these tools. If you think a 401k and a permanent life insurance policy are the peanut butter and chocolate of investment options, then start mixin’. But if you think a term life policy would be more complementary, then go for it. The best thing you can do is be smart, do some research, and weigh your options.

The opinions we expressed in this post are for general informational purposes only and are not intended to provide specific advice or recommendations.
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