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IUL vs 401k

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For a financially secure retirement, it is prudent to have a plan early. By diverting part of your paycheck into a tax-advantaged retirement savings plan, you can grow your wealth exponentially to cater to you and your loved ones.

Both employed and self-employed folks can invest in a retirement savings plan.

Yet, according to this study by the Employee Benefit Research Institute, only two-thirds of current employees understand the benefits of having a retirement savings plan.

Two popular retirement plan options are 401(k) and IUL (Indexed Universal Life) insurance. Virtually all retirement plans feature a tax advantage, whether when taking withdrawals or it is available upfront in the savings phase.

With IUL, returns are tied to an underlying index’s performance. If the index performs well, the policy attracts a higher rate, and the returns might shrink if it underperforms. An insurance company might also cap the rates of return to be credited to your account, no matter how the underlying index performs. For example, you might enjoy a 6% or 8% cap rate annually.

With 401(k), you can invest in EFTs or index mutual funds but aren’t locked into only those investments. Additionally, you can opt for target-date funds, actively managed funds, and other securities depending on your risk tolerance, goals, and investment time frame. Similarly, the rate of return is tied to the performance of the investments, but there’s no cap. For instance, if you invest in an index fund that rises by 20%, it’ll reflect in your 401(k) balance.


Let’s first look at the 401(k). These are a type of retirement savings account where employees contribute pre-tax income to an account. Often, employers match a percentage of the employee contributions.

The use of these retirement savings programs has risen tremendously since their establishment in the 1970s. Despite the not-so-good performance of the stock market since the start of the year, contributions to 401(k) retirement accounts have increased throughout 2022, according to the Fidelity study.

Before the introduction of significant regulations in 2006, participation was roughly 60%, according to estimates. Almost 90% of earners used these accounts to save for retirement in the late 2000s. Nearly 50 million workers and their employers contributed up to 3 trillion USD. Several years later, there’s a further increase in its retirement assets to $7.3 trillion as of March 2022.

While 401(k)s are more appealing to many high-income earners, they’re also beneficial to most workers in the middle-low end of the spectrum. With these programs, you invest a portion of your income into some form of financial vehicle, often a combination of several.

Sometimes, companies allow you to benefit from a “group rate” that reduces costs and offers access to exclusive funds.

401(k) contributions vary yearly depending on the IRS’s limit. Moreover, individuals 50+ years are allowed to contribute an extra $6,500 every year as a catch-up contribution.

When you opt for 401(k) to invest for retirement, paying close attention to fees – both the costs related to individual investments and fees charged by the plan itself is wise. For instance, if a mutual fund features a higher expense ratio, consider whether the higher rate of return justifies the cost.


IULs, Indexed Universal Life, are hybrid life insurance policies featuring interest earning accounts. These permanent life insurance policies are based on a stock market index. They allow individuals to participate in the upside of the stock market without any of the downside risk. 

Once you buy a policy, you enjoy cover for your entire life. Often, IULs are considered permanent, as you can maintain your approach until you surrender it or die. Upon death, your beneficiaries will get the death benefit.

For over a decade, IULs have been among the most profitable businesses in the life insurance industry. According to LIMRA, an industry-funded financial research company, new Indexed Universal Life insurance premiums went up by 29% in the 4th quarter of 2021 alone. It is the highest ever since 1983.

Indexed Universal Life insurance policies attract no penalties for early withdrawals. The cash value within the policy grows tax-deferred.

So, what makes IUL different from VUL (variable universal life insurance) and FUL (fixed universal life insurance)?

With IULs, you can earn interest from a stock market index without worrying about losing your value if there’s a drop in the stock market.

Indexed Universal Life (IUL) vs. 401(k): Similarities

Here are the top 3 similarities between 401(k) and IUL;

  • Tax-deferred
  • Investment tools for retirement
  •  Available to employees


401(k)s and IULs are tax-deferred vehicles, meaning that the money you invest in them does not attract taxes on the gains until it is withdrawn. With this feature, both can grow faster than if the investment taxed earned it. In an IUL however, the cash value can be taken as a loan, thus avoiding being taxed.

Investment Tools for Retirement

401(k) and IUL provide an array of interest earning options. 401(k) use mutual funds, bonds, and stocks. IULs use stock market indexes such as S&P 500, Nasdaq, and others.  


401(k)s are available to employees which are employed by a private or “For Profit.  Organizations. IULs are available to any individual or business who can qualify. 

Indexed Universal Life (IUL) vs. 401(k): Differences

The three significant differences between 401(k) and IUL are:

  • RMDs
  • Matching contributions
  • Death benefit


Unlike 401(k)s, IULs aren’t subject to RMDs (required minimum distributions), meaning taking money from your IUL policy every year is unnecessary regardless of age.

401(k)s are subject to RMDs. They need account holders to withdraw some money from their accounts every year.

Matching Contributions

Many employers provide contributions to their workers’ 401(k) plan, a percentage of what a worker contributes to the account, which is different from IUL.

IUL policies don’t offer a matching contribution. Also, employers can choose to pay premiums on the behalf of their employees. 

Death Benefit

In addition to offering a death benefit, IUL policies come with an extra cash value that account holders can use if they desire. 401(k)s plans do not offer a death benefit. However, the value of your 401(k) can be left to beneficiary.  

Indexed Universal Life (IUL) vs. 401(k): Which Is Better?

Each of these is better in its own right!

Indexed Universal Life policies are ideal for those who have conservative approaches to saving and seeking options for tax-free retirement. These contracts protect against losses. While providing a death benefit.

401(k) is an excellent choice for those that desire more investment options or want to contribute to a retirement plan via payroll deductions. In most cases, employers will match a portion of the employee contribution, which helps save more for retirement. Moreover, 401(k) account holders can also invest in money market funds, EFTs, mutual funds, bonds, and stocks.

Whichever option you settle for, it’s prudent to start saving for retirement as early as possible. The earlier you save, the more time your money will have to grow.

The Bottom Line

Sadly, most Americans are often behind in planning for retirement. You don’t want to lack money to live comfortably and solely rely on Social Security for your living expenses. Retirement doesn’t have to look ugly for you.

Two options that you can consider to safeguard your retirement are Indexed Universal Life (IUL) insurance and 401(k). The latter allows investors to invest money on a tax-deferred basis while at the same time enjoying tax deductions for their contributions.

On the other hand, Indexed Universal Life insurance allows you to secure a death benefit for loved ones while at the same time accumulating cash value which you can borrow against.

The bottom line is that both are handy in helping you build wealth for retirement. Having a mix of retirement savings options will help the retirement you want to have. 

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About the Author: Benjamin Hulburt

Benjamin Hulburt - Safe Wealth Plan