- Speak to a licensed sales agent!
- (800) 521-7873
Do You Need Life Insurance If You Have a 401k?
Do you need life insurance if you have a 401k? If people depend on you financially, you need life insurance – whether or not you have a 401k. Your 401k is intended to provide income for you during retirement, but life insurance protects your loved ones by paying them cash if you were to pass away. Life insurance can also provide supplementary retirement income for you, if you invest in a cash value policy that grows over time. We’ll explain how below. But as you’ll see, your need for life insurance is separate and different from your need for retirement savings.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873.
Life Insurance vs. a 401k: Two Tools with Different Uses
First, let’s talk about a 401k. You contribute to it on a tax-deferred basis while you’re working and invest and grow that money over time. Your employer may even match a percentage of what you’re able to contribute. Later, once you retire, you can start withdrawing money. Your 401k has a beneficiary, who will inherit your account after you pass away. The point? To save money to live off during retirement. You are the main beneficiary of a 401k account.
Compare that to life insurance. You make regular payments on an after-tax basis as part of your contract with the insurance provider. In return, when you pass away, the insurance company pays a tax-free death benefit to your beneficiary(ies).
Keep in mind that if you have a term life rather than a permanent policy, the insurance company only pays out if you pass away within your policy’s term. The point? To provide for your loved ones after you’re gone. Your loved ones are the main beneficiaries of your life insurance account.
As you can see, there’s not much crossover in the purposes of these two financial tools. So…do you need life insurance if you have a 401k? Yes, although it’s a good idea to talk with a licensed agent to figure out how much you may need.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873 or click the button below to get a free quote.
Why Do People Compare Life Insurance to a 401k?
The reason you’ll sometimes see life insurance compared to a 401k is because some life insurance policies can provide supplemental retirement income through their cash value component. However, life insurance cash value is not intended to be your sole method of retirement funding.
All permanent (lifelong) policies have a cash value account attached to the policy. A portion of your premium payments goes into this account, and the insurer adds a certain amount of interest. Different policy types pay different amounts of interest. Whole life, for example, pays a low, flat rate that’s guaranteed for the length of the policy. Variable life, on the other hand, gives you the chance to invest your cash value in actual securities, so you have the chance to earn more, but also add the risk of loss.
Over time, your cash value will grow on a tax-deferred basis, much like the money you invest in a 401k. Also like a 401k, your cash value is an asset. You can borrow against it, or withdraw some or all of that cash value. You can even use it to pay future premiums. When you start withdrawing it, you only owe income tax on the amount that exceeds what you’ve already paid into the policy. For example, if you pay $3,000 per year for your policy, and you’ve owned it for 20 years, you’ve paid $60,000 into your policy. If your cash value balance was $80,000, you could withdraw $60,000 of that balance tax-free.
We have clients who let their permanent policies grow for 15, 20, or even 30 years…and then withdraw cash or take a low-interest policy loan to supplement their retirement income. Or pay for home renovations. Or put kids or grandkids through college. There are zero restrictions on what you can do with your cash value.
So while both a 401k and permanent life insurance can provide income later in life, as you can see, they’re vastly different in purpose and scope. So to answer the question, “Do you need life insurance if you have a 401k?”, we’ll tell you: yes, almost certainly.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873 or click the button below to get a free quote.
Life Insurance vs. 401k: A Comparison Chart
Let’s take a clear look at the differences between two types of life insurance and a 401k.
| Term Life Insurance | Permanent Life Insurance | 401k | |
| Primary purpose: provide retirement income | N | N | Y |
| Primary purpose: provide income-tax-free death benefit for your loved ones when you die | Y | Y | N |
| Coverage lasts the rest of your life | N | N | n/a - a 401k is not an insurance policy |
| Can set up automatic payments | Y | Y | Y |
| Provides tax-deferred savings | N | Y - via the cash value account | Y |
| Penalties for early withdrawal of funds | n/a - no cash value to withdraw | N | Y - if funds are withdrawn before age 59 ½ |
| Investment opportunity that comes with the possibility of gains & losses | N | Only with certain types, such as variable life insurance | Y |
| Paid for via payroll deductions | Not usually | Not usually | Y |
| Decreases your taxable income for the year | N | N | Y |
| Employers contribute to your account | n/a – no cash value to contribute to | N | Sometimes - depends on the employer |
| Offers provisions for accessing funds in special cases | Usually (early access to death benefit via terminal illness rider, chronic illness rider, long-term care rider, etc. – only the terminal illness rider is likely to be free) | Usually (early access to death benefit via terminal illness rider, chronic illness rider, long-term care rider, etc. – only the terminal illness rider is likely to be free) | Sometimes (depends on employer/account administrator, documentation of need, 10% penalty, and income tax due on withdrawal) |
Do you need life insurance if you have a 401k? We tell our clients to think of these two issues separately. If you have family members who depend on your paycheck, you need life insurance. Because even if they inherit your 401k when you pass away, there’s going to be a heavy tax burden if they cash it out. If they roll it over into their own 401k accounts, that money is not going to be able to put food on the table or pay the rent. On the other hand, a life insurance death benefit can do both of those things for them, without the tax liabilities.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873 or click the button below to get a free quote.
Conclusion: Do You Need Life Insurance If You Have a 401k?
A life insurance policy and a 401k don’t serve the same purpose, and most people need both.
- For retirement savings: This is exactly what a 401k is designed for. It is not designed to pass tax-free money to your loved ones.
- For income replacement if you pass away: Only life insurance can provide an income-tax-free cash death benefit when you pass away. Although permanent policies can build cash value that you can use later to supplement your retirement income, life insurance is not designed and should not be used as your primary retirement savings vehicle.
Want to talk to a real person about whether you need life insurance? We’d love to chat! Call us at (800) 521-7873 or click the button below to get a free quote.
