If you're exploring ways to beef up your retirement savings, you've probably wondered whether life insurance could play a role alongside your 401(k). It's a fair question—especially when you hear about Indexed Universal Life (IUL) insurance being marketed as a retirement vehicle. But here's the truth: these two financial tools serve different purposes, and understanding the difference could save you from making a costly mistake.
Let's break down how 401(k)s and life insurance stack up for retirement planning, when each makes sense, and whether you should consider using both.
The 401(k): Your Retirement Foundation
Your 401(k) is purpose-built for retirement. In 2025, you can contribute up to $23,500 per year ($34,750 if you're between ages 60-63, thanks to the new enhanced catch-up provision). If you have a traditional 401(k), those contributions reduce your taxable income right now. That means if you're in the 24% tax bracket and contribute $10,000, you'll save $2,400 on your tax bill this year.
Your employer might also match your contributions—typically 3-6% of your salary. That's free money that immediately boosts your retirement savings. If you're not contributing enough to get the full match, you're literally leaving cash on the table.
The downside? You'll pay taxes when you withdraw the money in retirement. And if you need to access your 401(k) before age 59½, you'll typically face a 10% penalty plus income taxes. Your money also grows based on your investment choices—which means market volatility can impact your balance.
How Life Insurance (IUL) Works for Retirement
Indexed Universal Life insurance is a type of permanent life insurance that builds cash value over time. Here's how it works: part of your premium goes toward the death benefit that protects your family, and the rest accumulates in a cash value account that grows based on the performance of a stock market index (like the S&P 500).
The appeal? Your cash value is protected from market losses. If the market drops, your cash value doesn't decrease. But there's a trade-off: your gains are capped. So if the market soars 20% in a year, you might only capture 8-12% depending on your policy's cap rate.
For retirement planning, the key feature is that you can access your cash value through policy loans—and those loans are tax-free as long as your policy stays active. Unlike a 401(k), there's no age requirement for accessing this money. Need cash at 45? No penalty. This flexibility appeals to people who want options before traditional retirement age.
But here's the catch: IUL policies come with significant fees. You'll pay premium loads (fees taken from each payment), monthly administrative charges, cost of insurance (which increases as you age), and surrender charges if you cancel within the first 10-15 years. These fees can eat into your cash value accumulation, especially in the early years.
The Tax Treatment Difference
This is where things get interesting. With a traditional 401(k), you get a tax deduction now but pay taxes later when you withdraw in retirement. With a Roth 401(k), you pay taxes now but withdraw tax-free later.
IUL sits in a unique middle ground. Your contributions aren't tax-deductible (you pay with after-tax dollars). But your cash value grows tax-deferred, and if you access it through policy loans rather than withdrawals, that income is tax-free. This can be powerful if you expect to be in a high tax bracket in retirement.
One strategy some high earners use: they max out their 401(k) to get the upfront tax deduction and employer match, then use IUL for additional tax-free income in retirement. This gives them multiple buckets with different tax treatments, providing flexibility to manage their tax bracket year by year.
Who Should Consider Each Option?
Start with your 401(k)—always. At minimum, contribute enough to get your full employer match. If you're not already maxing out your 401(k) or IRA, those should be your priority. The tax advantages and lower fees make them the better foundation for most people's retirement planning.
IUL makes sense as a supplemental strategy if you're already maxing out traditional retirement accounts and you want additional tax-advantaged savings. It's particularly popular with high-net-worth individuals who need life insurance coverage anyway and want to build supplemental retirement income. IUL accounted for 24% of the U.S. life insurance market in 2024, with sales expected to grow 2-6% in 2025 as more Gen X members approach retirement age.
IUL might also make sense if you're self-employed with irregular income, want protection from market downturns, or need access to funds before age 59½ without penalties. But be realistic about the fees and understand that this is a long-term commitment—those surrender charges mean you could lose significant money if you bail out early.
What About Using Both?
There's no rule saying you can't use both—in fact, combining them can be smart if you have the financial bandwidth. Max out your 401(k) first to capture the employer match and tax deduction. Then, if you still have money to save and you need life insurance coverage, consider IUL as an additional layer.
This approach gives you tax diversification in retirement. You can pull from your 401(k) up to the top of a lower tax bracket, then use tax-free IUL loans to supplement without pushing yourself into a higher bracket. You'll also have the life insurance death benefit protecting your family.
Just make sure you're working with a fee-based financial advisor who can help you run the numbers. IUL policies are complex, and not all are created equal. The wrong policy with excessive fees can seriously undermine your retirement goals.
How to Get Started
If you're not already contributing to your 401(k), start there today. Aim to contribute at least enough to capture your employer match—that's typically 3-6% of your salary. Once you're on track with your 401(k), consider whether IUL makes sense for your situation.
If you decide to explore IUL, shop around and compare policies from multiple insurers. Look carefully at the cap rates, fees, and surrender charge periods. Ask for illustrations showing how your cash value would grow under different market scenarios. And most importantly, make sure you can afford the premiums for the long haul—this isn't something you want to cancel after a few years.
The bottom line? Your 401(k) should be your retirement workhorse. Life insurance can play a supporting role if you need coverage anyway and have already maxed out traditional retirement savings. Think of your 401(k) as the foundation and IUL as an optional upper floor—but only after you've built that solid base.
