Life Insurance vs Roth IRA

Life insurance policies and Roth IRA’s may both be important financial planning tools that should be in your financial portfolio, but they are two very different types of financial vehicles that serve entirely different purposes.

If you are on a mission to start planning for your family’s financial future, it is very important to distinguish between different products and accounts so that you can decide which will meet your needs and which you will stay away from.

While life insurance policies and Roth IRAs may have some similarities, there are far more differences.

If you do not know the differences before you make a purchase, you could make mistakes that are difficult to come back from.

Read on to learn the basics on Roth IRA’s as well as the basics on Life Insurance so that you can be an informed consumer when you are shopping the market and planning for asset protection and retirement.

And use the FREE search tool to begin your quote comparison.

What is a Roth IRA?

A Roth IRA is a special form of Individual Retirement Account that you can contribute to and earn interest on.

Unlike a Traditional IRA, the contributions that you make to a Roth IRA are not tax deductible because of the fact that qualified distributions are tax-free.

There are tax-free deductions because, in order to eligible to contribute to a Roth IRA account, you must meet certain income restrictions.

The money that you use to contribute to your account is made up of after-tax dollars so there will not be an upfront tax break, but the break will come as your money grows tax free.

This is much different than the taxation of a traditional IRA, which will delay taxes until you reach retirement.

This is why a majority of people who are looking for retirement savings accounts and who make less than $105,000 ($167,000 if married) will choose to contribute to a more flexible Roth IRA than a traditional IRA that only offers tax breaks at the year when the contributions were made.

Who is eligible for a Roth IRA?

There are a few eligibility requirements that you must meet to be eligible to fund a Roth IRA. One of the requirements is that your income cannot be higher than the income eligibility limits for the year that you are contributing in.

There are also maximum contribution limits each year. People younger than 50 can contribute $5,500 per year, but those 50 and older can catch-up and contribute $6,500 per year if they meet income eligibility requirements.

Unlike a traditional IRA, there are no age restrictions to start a Roth IRA account.

There are, however restrictions on where your money comes from. You can only open a Roth if you have income from a job and not from self-employment, student loans, or disability insurance.

It is best to start contributing while you are young so that you will enjoy tax-free growth for longer, but if you waiting until near retirement it is possible to still save until it is time to withdrawal.

Who is the Roth IRA For?

Anyone who will not be able to live off of their social security when they reach retirement has a need for a retirement account. The Roth IRA is an indispensable savings tool for individuals who want to accumulate their money and watch it grow tax-free without being restricted as to when they can access it.

With this type of account, you will enjoy the power of a tax shelter until you reach your retirement. At that time, you can withdraw the money and your earnings without being penalized or taxed in any way.

If your goal is to increase your income and your net worth over the years, it is much better to be taxes on the money that you pay into the account because you should essentially be at a higher tax bracket when you retire. If you were to postpone the taxation, you would be paying more taxes at the higher bracket.

What is life insurance?

Life insurance is not a retirement savings account. Instead, it is an insurance product that provides your beneficiaries with financial protection if you pass away.

The financial tool can be used for a variety of different types of protection.

Depending on your long-term goals, life insurance can be used for all of the following: income replacement, paying off debts, final expenses, passing on an inheritance, paying estate taxes, and creating savings.

Types of Life Insurance

Just like there is more than one type of IRA, there is more than just one type of life insurance.

All life insurance plans fall into one of two categories. You will either buy a term insurance plan or a permanent insurance plan that each have their own advantages and disadvantages.

Read on, so that you can decide which type of life insurance caters to your needs.

Who is term life insurance for?

Term life insurance is a temporary insurance plan that will provide you with financial protection for a specified period of time. The terms can last between 1 year and 30 years in length, with most plans offering you level premiums and level death benefits for the entire period.

Term life insurance is the most popular type of life insurance on the market today because it is extremely affordable and provides protection for a specific time period where the named insured’s financial obligations are very high.

About 97% of all individuals who choose to buy term life insurance will select a level term because their premiums will stay the same for as long as the term is in effect.

The premiums will be set at the time the application is approved and will not go up as the insured ages.

Some individual will buy annual term policies, which provide level premiums for only a year at a time. These policies may cost more, but for people who do not want to take a medical exam this type of insurance is typically not underwritten.

Annual terms are also a good choice if you are going out of the country or you need coverage quickly without waiting for a 30 or 60 day underwriting period.

Who is permanent life insurance for?

Permanent life insurance is a much more complex plan that offers you whole life protection as long as you keep your payments up.

Permanent insurance is often called cash value insurance because not only does it provide you with life coverage, it also has a cash value account where a portion of your premiums will sit and earn interest. You can either let the money sit in that account and grow or you can withdrawal the money and pay it back.

Permanent insurance plans include whole life and universal life plans. Whole life insurance has level premiums for the rest of your life and the death benefit will stay level as well.

Universal life is more flexible because you can decide to fund it with less at the inception and then steadily increase the premiums to increase your cash value.

Because cash value grows tax-deferred and your beneficiaries will receive a tax-free death benefit, a permanent life insurance plan is much more similar to a Roth IRA than a term insurance plan is.

How are Roth IRAs and permanent insurance plans different?

While some insurance agents claim that permanent insurance can completely replace the need for a retirement savings account, there are some differences that you should know about.

A permanent life insurance does not offer interest-free withdrawals.

If you were to borrow from your policy, which is essentially like you are taking a loan out from yourself, you will need to pay yourself back the interest that you would have accrued.

If you didn’t do this, you would be earning interest on money that you did not have sitting in your cash account.

Another factor you should consider is that a Roth IRA is inexpensive and has very little fees associated with it. When you start a permanent life insurance plan, most of the fees are charged in the first two years.

You must pay expenses for the insurer to manage your investments, but those fees go down as the policy ages. If you plan on keeping your plan for several years and you want life coverage in addition to a savings vehicle, this will not be a drawback.

Roth IRAs are meant to help you build a nest egg and life insurance will help you protect that nest egg for the sake of your family. If you want to purchase life insurance so that your savings is not depleted when you pass away, it is time to price the cost of products available.

The easiest way to price shop when you are comparing life rates is to use a life insurance rate comparison tool. Enter your personal information, select a product, and then choose an affordable rate quote.

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