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IUL vs 401k: Informed Choices for Retirement

IUL vs 401k
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

 7 minute read

Have you ever stopped to wonder if all that money you’re putting into your 401k is really the best thing you can do to make sure that you have enough money to retire? Will you outlive your money?  Are your savings safe from another market downturn like the one we recently experienced? What is better, an Indexed universal life or a 401k?  Maybe you should consider a mix of the two options.  We will review the IUL vs 401k debate in this article.

IUL vs 401k: Comparing Growth, Risk, and Tax Benefits

Millions of Americans contribute some of their earnings to employer-sponsored retirement plans simply because it’s all they know.

From the day you started your first job, all you heard was to start saving for retirement in your 401k.  But as we’ve learned, it is always best to explore all available options so you can make the most informed decision. One of those options we should explore is indexed universal life insurance, commonly referred to as IUL.  You may or may not have heard of IUL, but I can assure you that you will be hearing more in the future.

Indexed universal life has been around since 1997 and is currently growing in popularity because of its ability to produce tax-free retirement income that is safe from market risk.  Here, we’ll discuss IUL vs 401k.

You may be asking, life insurance? I thought this was about saving for retirement. Don’t worry, it is. I want to talk about the two main benefits that an IUL can provide. The obvious first part is that it provides a life insurance payout when you die. In addition to that, an IUL builds cash value throughout the years as you pay your premium. This cash value can then be used to supplement your retirement.  The distributions from your IUL are tax-free.

So what is an IUL, you ask, and how does it compare to a 401k? As mentioned above, it is an indexed universal life insurance policy. Yes, you pay premiums for the policy, just like other types of life insurance. The goal of an IUL policy is to earn interest at a higher rate than your traditional universal life insurance policy. When you pay your premium, a portion goes towards the cost of the life insurance and fees, and the remainder is added to the cash value of the policy. You allocate your premium to one or more index options that you expect to earn higher than normal interest. Your cash value then grows at the rate at which your selected index options grow. The idea here is to pay as much money as you can into the policy while keeping the amount of life insurance to a minimum.

Remember that your money is not directly invested in the stock market with an IUL policy, which keeps it safe from stock market losses.

Most IUL policies have a guaranteed minimum interest rate of around 2%-3%, ensuring you will never have a negative return. You will be able to earn a bigger return while ensuring that your money is not at risk of being lost. You get part of the stock market growth while protecting yourself from losses. 

As mentioned earlier, many people invest for retirement in a 401k. While this does offer initial tax benefits, consider what a crash in the market could do to your hard-earned money. In 2008, people who lost 50 percent of their funds took about six years to get their 401k back to where it was before the crash.  Again, in 2022, we had another market correction, the largest since 2008.  The S&P 500 lost around 20% of its value in 2022.  If you had money in the market, you lost.


IUL vs 401k


What would happen if you were nearing retirement when a 20% loss happens? Many in this predicament don’t stay in the market, so they never recover their losses. Imagine if you saved your entire working life for retirement, and a year before you retired, half of your savings were gone in the flash of an eye. Not so with an IUL vs 401k.

Doesn’t it make sense to put some of your savings in a vehicle that protects your nest egg and guarantees you a minimum rate of return?  

There are fees associated with both a 401k and an IUL. You can count on around 2% fees on your 401k plan. It doesn’t sound like a lot, but an average worker will pay around $150,000 in 401k fees over their lifetime, and a high-income earner will pay closer to $400,000 in 401k fees.  So the question then becomes, what are you getting in return for your 2 percent?

An IUL vs 401k comparison is best explained using our 401k vs IUL Calculator.

Remember that with the IUL, you are guaranteed a return, and with a 401k, you are not.  Over the last 25 years since IULs have existed, returns have been consistently around 6% to 7%. The main reason for this is the floor guarantee. The 401k can’t provide this same level of safety.

We all know that taking early withdrawals from a 401k is not a great idea. Sometimes, however, we go through tough times where it is necessary to access those funds.

When you withdraw from your 401k before age 59 ½, you get a 10% penalty and pay federal and state taxes on the amount withdrawn. This will usually propel you to a higher tax bracket than you are currently in. You could lose over half of the withdrawal to income taxes. Imagine if you made a $50,000 withdrawal. You can count on $5,000 just in penalties, and you still have to pay taxes on the $50,000. With an IUL, you pay no such penalty, regardless of age. You can withdraw your funds or borrow against your life insurance. You don’t even have to pay the loans back.

Additional benefits of an IUL that a 401k doesn’t provide are accelerated benefits. 

What this essentially means is that if you suffer from a critical illness such as a heart attack, cancer, or stroke, funds can be paid to you now. This is an acceleration of the death benefit.  Now consider long-term care. If you cannot perform 2 of 6 activities of daily living, most of your death benefit can be accelerated to help cover the cost. Mobility, bathing, eating, dressing, personal hygiene, and using the restroom are the six basic activities of daily living. This money can then be used to cover the cost of long-term care. This benefit is considered by many for covering the cost of long-term care due to the higher cost of individual long-term care insurance.

401k vs IUL: Tax Deferred or Tax-Free? 

The 401k is fully taxable since these funds have never been taxed. Income from your indexed universal life insurance policy, however, will be paid to you tax-free.

Would you rather pay taxes on the seed or the harvest?

If you are in a 25% income bracket at retirement, you must withdraw $134,000 from your 401k to net $100,000. And, the income from your indexed universal life policy is not taxable as income.

Using IUL as a retirement supplement offers multiple benefits you can not get from your 401k.

  • You are providing an income tax-free death benefit for your family.
  • You are creating a retirement income stream that is tax-free.
  • You are protecting yourself from critical, chronic, and terminal illnesses.
  • You are protecting your retirement savings from market risk.

And unlike other forms of insurance (car, home, long-term care, etc.) that you pay for and may never need, an IUL insurance policy is guaranteed to be used. This gives you guaranteed value for the money you put into your policy.

IUL vs 401k: Maximizing Retirement Income and Security

Using an IUL as a supplement to your 401k offers optional benefits. You are guaranteed a minimum return while protecting yourself from things like the market crashes of 2000, 2008, and 2022.

It may be a good idea to have options.  When you put all of your retirement savings only in traditional plans, you are subject to history repeating itself.  We have been able to help thousands of people like you improve their financial position by introducing them to indexed universal life.

IUL may or may not be right for you.  If it isn’t, we will tell you.  If it is a possibility, we can show you the options. 

We can quickly run a model of an IUL to see if it will work for you; call us at 1-800-712-8519 or use the IUL calculator on this page.


Frequently Asked Questions

What Are the Key Differences Between a 401k and an Indexed Universal Life (IUL) Policy?

A 401k is a retirement savings plan sponsored by employers, offering tax-deferred growth and typically including investment options like stocks and bonds. An IUL, on the other hand, is a type of life insurance that provides both a death benefit and a cash value component, with returns linked to a market index but with certain protections against market downturns.

How Does the Tax Treatment of a 401k Compare to That of an IUL?

401k plans offer tax-deferred growth, meaning you pay taxes on withdrawals in retirement. Contributions may also reduce your taxable income. IULs offer tax-deferred growth on cash values and tax-free distributions in retirement. Additionally, the death benefit is generally tax-free to beneficiaries.

Can I Access My Funds in a 401k and IUL Before Retirement?

With a 401k, early withdrawals before age 59½ typically incur penalties and taxes. Some plans allow loans. In contrast, IUL policies provide more flexible access to cash values through loans or withdrawals, which can reduce the death benefit.

Which is Better for Long-Term Retirement Savings: 401k vs IUL?

The answer depends on individual financial situations, goals, and risk tolerance. A 401k might be more suitable for those who prioritize high growth potential and are comfortable with market risks. An IUL could be better for those seeking a combination of life insurance protection and tax advantages, with more stable, albeit potentially lower, investment returns, 

author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of