When you are making financial decisions pertaining to your future, you may have come across various options such as variable life insurance and a 401(k). Depending on who you contact and speak to, you will hear both sides as to why you should pick variable life insurance or a 401(k). With these two aspects to consider, what is the absolute best investment? Both of them can be a beneficial option for your financial future and can help with growing your money and planning for the future. Usually, most experts and financially aware individuals recommend opening up a 401(k) first. Having said that, if you are seeking additional investments, variable life insurance may be a beneficial option for you.

variable life vs 401k

What is Variable Life Insurance?

Variable life insurance is a form of permanent life insurance that also enables an investment component. With variable life insurance, the policy has a cash value amount that allows you to invest a number of sub-accounts available within the policy. These subaccounts act similar to a mutual fund – with the exception that it is only available within a variable life insurance policy. Typical variable life insurance policies will sometimes have as much as 50 different options to choose from.

With variable life insurance, the cash value account has the potential to grow with time. This is because the underlying investments in the policy’s sub-accounts will grow. With that being said, if the underlying investments take a dip, then the cash value may as well. Individuals still find this to be an extremely beneficial option because of the appeal of the investment element that is available within the policy as well as the favorable tax treatment of the policy’s cash value growth. Annual growth of the cash value is not taxable as ordinary income. Furthermore, these values are able to be accessed in later years and when done properly they may be received free of income taxation – which is a big plus. In order to do this properly, you will need to access the value through loans using the account as collateral instead of direct withdrawal. This will save you from the taxation down the road.

Similar to a mutual fund and other forms of investment, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees, and sub-account expenses.

What is a 401(k)?

A 401(k) is a retirement plan that is usually sponsored by an employer. It allows workers to save and invest a piece of their paycheck before taxes are taken out. Taxes will not be paid until the money is withdrawn from the account. With a 401(k) you are able to control how your money is invested. Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. The most popular option tends to be a target-date fund, which is a combination of stocks and bonds that will become more conservative as you reach retirement.

Some of the most important benefits to consider within a 401(k) includes the following:

  • Tax Benefits – The money that you put into a 401(k) is tax-deferred, which means that you do not have to pay taxes on it until you withdraw it for retirement.
  • Deduct Contributions on Taxes – When you put money into a 401(k), it will decrease your taxable income for the year.
  • Potential Free Money – Many employers will match contributions you make to your 401(k). An example of this would include a company matching each dollar you put into your 401(k) up to approximately 3% of your pay.

Should I Purchase a Variable Life Insurance Policy or Open a 401(k)?

As mentioned previously, many will say that opening a 401(k) is a great option – especially if your employer is matching your contributions. If you are comparing variable life insurance and a 401(k), then you should take a look at them in terms of investment.

The cash value within a variable life insurance policy will usually garner around 1.5% to 3.5% yearly return, while the average yearly return for a 401(k) is around 5% to 8%.

Experts will recommend contributing the maximum to your retirement accounts.

Am I Able to Get Variable Life Insurance and Open a 401(k)?

Of course, you are able to obtain both if that is what you are seeking. Having both of these options will not hurt you in any way shape or form and are great ways to save money and better prepare for your financial future. If you have already opened up a 401(k) and are still considering variable life insurance, then you should contact an insurance company in order for them to properly quote you. Variable life insurance allows you to have financial protection for when anything unexpected may happen to you, and purchasing both is fairly common. Having a variable life insurance policy is very affordable and will save you financial trouble down the road if anything was to happen. 

Leave a Reply

Please fill all the fields below (your email won't be displaied on the site).