How Whole Life Insurance Compares to a 401k

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401(k) vs. Life insurance – is there more than one way to save for your future? When it comes to retirement, you have more options for saving money than qualified plans, like an IRA or 401(k). Life insurance is another vehicle that helps you achieve your retirement goals, often with more benefits, more security, and more liquidity than a 401(k).

Consider this scenario:

What if your employer approached you with a retirement account that came with unlimited access to cash and contributions, provided market safety, and offered you a steady rate of return? You were then told that this same retirement account was completely controlled by you with very little government regulation and came with tax benefits. Knowing that this type of plan was available, would that make you feel better about saving for retirement?

This is what whole life insurance for retirement, also called a life insurance retirement plan (LIRP) does. It provides true financial security and abundance.

401(k) vs. Life Insurance Retirement Plan

Choosing to utilize whole life insurance for retirement income comes with unique benefits not found in 401(k) or IRA qualified plans. The key differences fall under the following six categories.


The guaranteed rate of return offered by whole life insurance takes the guesswork out of your portfolio. Instead of saving for retirement inside a 401(k), life insurance allows your money to earn a steady return rate year after year. There is no question about whether your money could be lost due to market swings.

A 401(k) is often described as the modern replacement for a pension, but it’s not an equal replacement. A pension is a sure bet contractually, with a defined benefit paid out every month. A 401(k) life insurance plan doesn’t guarantee anything. It doesn’t guarantee the rate of return, fees, income, or future balance. 

Some would argue that the lucrative gains found in the stock market can’t be matched by whole life insurance. It’s true that the average rate of return on a whole life insurance policy is about 4-6%, but there is very little risk associated with this type of retirement fund. The money in your 401(k) could grow, but that’s not a certainty—the stock market could crash. It has multiple times before and it will again. Examine your appetite for investment risk. Are you ready for a more certain financial future?


401(k)s and IRAs—with the exception of a Roth IRA—are paid for with pre-tax dollars. You accumulate wealth within these qualified plans on a tax-deferred basis. Your distributions are taxed—at a rate TBD! The reality is, you don’t really control your retirement savings inside a 401(k) or IRA; the IRS controls how much you’ll have to spend in retirement. 

Whole life insurance premiums are paid for with after-tax dollars. Paying taxes upfront ensures you won’t get hit with a large tax bill down the road. But that’s not the only tax benefit of whole life insurance vs. a 401(k). Life insurance policies earn guaranteed interest, plus non-guaranteed dividends (the insurance companies Paradigm Life works with have been paying dividends for over 100 years). The interest and dividends grow tax-free inside your policy and can be used in a variety of ways for additional tax advantages, including as tax-free retirement income.

Finally, because your whole life policy is a private contract between you and your insurance company, funds inside of a whole life insurance are afforded unique asset protections. They typically cannot be seized as part of bankruptcy filings or legal judgements and are usually not subject to probate. Further, your insurance policy can act as loan collateral, keeping assets like real estate and businesses protected from creditors. The same cannot be said of a 401(k).


Is a 401(k) the best place to put your money? The truth is it depends on when you need to use it. Funds inside of qualified plans can’t be accessed before age 59 1/2—if you need your money sooner, you’ll be charged a 10% penalty on top of the taxes you’ll owe the IRS. If you have a family emergency, stumble upon a chance-of-a-lifetime investment opportunity, or need capital for your business, Uncle Sam is going to take his cut.

Unlike a 401(k), whole life insurance funds are easily accessible. The money inside your policy can be used at virtually any time, for any reason. Whole life insurance comes with an inherent cash value. This cash value is your liquidity. The beauty about accessing this liquidity from a properly structured policy is that you can do it without forfeiting your policy’s value. 

Borrowing from the insurance company with a policy loan is one of the easiest ways to access liquidity. You can borrow up to the amount of cash value in your policy for any of life’s expenses (and policy loans are tax-free, meaning you have tax-free access to the interest and dividends you’ve earned). Real estate, business expenses, children’s college tuition, unexpected medical bills, investment opportunities, cars, and vacations are just a few examples. Keep in mind, your death benefit does change if you pass away with an outstanding loan. This is because the insurance company will use your policy as collateral.


When your money builds inside of your whole life policy with earned interest, you are creating an inflation hedge due to the guaranteed growth, the cash value of the policy, and the likely dividend payment. (Remember, most life insurance companies have consistently paid out dividends for over 100 years.) You’re also hedging against market volatility.

Many 401(k) owners believe their investments are diversified among a variety of mutual funds. The reality is all these funds are based in the market, so not really diverse at all. In today’s world, the global interconnectivity of industries and companies leave even the most diverse 401(k) portfolio exposed to risk. Whole life insurance adds a new level of diversity to a retirement portfolio—you don’t have to choose between a 401(k) and insurance, but if you have a 401(k) life insurance is a necessity!

Referred to as the Volatility Buffer Strategy, using the cash value of your whole life insurance policy for income in years after a market downturn allows your 401(k) time to rebuild without lasting ramifications to your retirement income. It could be the difference between leaving wealth for your heirs or running out of money before you die.

Cash Flow

Often referred to as an “AND” asset, every dollar in a whole life insurance policy spends like two dollars. You can borrow a (tax-free) dollar in the form of a policy loan and that same dollar still earns guaranteed interest and non-guaranteed dividends. When it comes to a 401(k), on the other hand, when you take a dollar distribution it’s taxed and it no longer earns interest for you.

Another aspect of increased cash flow has to do with contribution limits. 401(k)s, IRAs and Roth IRAs all have maximum contribution limits, meaning the IRS dictates how much you’re allowed to invest. This also puts a cap, more or less, on how much wealth you can accumulate and how much you’ll have to spend in retirement. Whole life insurance is much more flexible. If you’ve maxed out your qualified plan contributions and are wondering what to do with the rest of your money, whole life insurance works to immediately increase your wealth and provides easy access to cash flow you can use now AND in retirement. 


Here’s another reason to consider ditching the 401(k): Life insurance offers you a death benefit to leave a legacy to your heirs. You can leave this legacy to a spouse or child, divide it among multiple beneficiaries, or put it in a trust to be used for generations to come. It’s how the wealthy have passed on their fortunes for generations and avoided paying estate taxes.

While it is possible that a 401(k) will have money leftover that can be passed on to family (after it’s been taxed by the IRS), it is more common for people to run out of funds from their 401(k) while still living. With whole life insurance, you’re guaranteed death benefit (minus any unpaid policy loans) goes to your beneficiaries—typically tax-free. 

The structure of a whole life insurance policy allows you to enjoy income in retirement but keeps the death benefit protected for future use by your beneficiary (provided you don’t have outstanding policy loans, which affect the amount of the death benefit).

Which to Choose: 401(k) vs. Life Insurance?

Traditional 401(k)s are savings accounts with large strings attached. You can’t access your money without restriction. If you do liquidate, you’re taxed and penalized with a fee. On top of that you are limited to how much you can put into your 401(k) and you’re told what investment options you can participate in. Your control and flexibility is very limited by your employer.

Whole life insurance gives you the opposite of what a 401(k) does—complete control and flexibility. As the contractual owner of your policy(s),  you can access your cash value whenever you want to and invest in whatever you want. You are not limited to select investment choices that your employer has chosen for you in a traditional 401(k).

Further, you don’t necessarily have to choose between a 401(k) and life insurance. There can be a place for both as part of your wealth strategy. The important thing is to allocate funds to each in a way that minimizes your exposure to market volatility while optimizing gains. Deciding which is right for you depends on your goals, your tolerance for risk, and how you wish your family to be cared for after you’re gone.

The Hierarchy of Wealth

The Hierarchy of Wealth showing truly diversified wealth strategy for retirement

Much like Maslow’s Hierarchy of Needs, the Hierarchy of Wealth outlines a path to structure your assets for maximum security/control with the least amount of risk. This isn’t necessarily a “play-it-safe” investment strategy, but one that is proven to weather market downturns and maximize the amount of wealth you can accumulate over your lifetime. 

According to the Hierarchy of Wealth, there is ample room in your investment portfolio for both a 401(k) and what are called Tier 1 assets. Tier 1 assets include your whole life insurance policy (we call it a Wealth Maximization Account™) and 6-24 months of living expenses. Thanks to the policy loan feature of whole life insurance, your policy can take the place of your emergency savings account because it’s highly liquid—you can use a policy loan whenever you need, for whatever you need. Because any unpaid amounts are deducted from the death benefit, you don’t have to worry about going into credit card debt or relying on bank loans.

The other three tiers allocate assets for personal development, real estate, business expenses, hard money lending, and mutual funds/ETFs. When you distribute your savings in this manner, you can still invest in a 401(k) and own life insurance. This strategy provides you and your family with a solid financial foundation proven to grow and protect wealth.

Customizing Your Life Insurance Plan

A good life insurance agent will construct your whole life insurance policy in a way that rapidly grows cash value and will teach you in detail about what you can do to never run into a situation that threatens your policy.

 To learn more about enriching your retirement plan, schedule your complimentary virtual consultation here with a Wealth Strategist.


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