Do You Need Life Insurance If You Have a 401k?
Why Do People Compare Life Insurance to a 401k?
The reason you’ll sometimes see life insurance compared to a 401k is because some life insurance policies can provide supplemental retirement income through their cash value component. However, life insurance cash value is not intended to be your sole method of retirement funding.
All permanent (lifelong) policies have a cash value account attached to the policy. A portion of your premium payments goes into this account, and the insurer adds a certain amount of interest. Different policy types pay different amounts of interest. Whole life, for example, pays a low, flat rate that’s guaranteed for the length of the policy. Variable life, on the other hand, gives you the chance to invest your cash value in actual securities, so you have the chance to earn more, but also add the risk of loss.
Over time, your cash value will grow on a tax-deferred basis, much like the money you invest in a 401k. Also like a 401k, your cash value is an asset. You can borrow against it, or withdraw some or all of that cash value. You can even use it to pay future premiums. When you start withdrawing it, you only owe income tax on the amount that exceeds what you’ve already paid into the policy. For example, if you pay $3,000 per year for your policy, and you’ve owned it for 20 years, you’ve paid $60,000 into your policy. If your cash value balance was $80,000, you could withdraw $60,000 of that balance tax-free.
We have clients who let their permanent policies grow for 15, 20, or even 30 years…and then withdraw cash or take a low-interest policy loan to supplement their retirement income. Or pay for home renovations. Or put kids or grandkids through college. There are zero restrictions on what you can do with your cash value.
So while both a 401k and permanent life insurance can provide income later in life, as you can see, they’re vastly different in purpose and scope. So to answer the question, “Do you need life insurance if you have a 401k?”, we’ll tell you: yes, almost certainly.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873 or click the button below to get a free quote.
