Life Insurance vs. 401(k): Which Is Better for Retirement Income?

When planning for retirement, most people are told to “just max out your 401(k).” While that may be sound advice in certain situations, it’s not the only option—and depending on your goals, it might not be the best one either.

At New Sun Life Solutions Brokerage, we often work with clients who are surprised to learn how certain types of life insurance—particularly Indexed Universal Life (IUL) policies—can serve as a powerful, tax-efficient retirement income strategy.

So let’s break it down: 401(k) vs. Life Insurance—what’s the difference, and which is right for you?

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement account that allows you to contribute pre-tax dollars. Your money is typically invested in mutual funds, and it grows tax-deferred.

Sounds great, right? But here’s the catch:

✅ Contributions are limited (in 2024, $23,000 max if under 50)

✅ All withdrawals are fully taxable as ordinary income

✅ Required Minimum Distributions (RMDs) begin at age 73

❌ No protection from market downturns

❌ Limited flexibility—withdrawals before 59½ may be penalized

What Is an Indexed Universal Life (IUL) Policy?

An IUL is a type of permanent life insurance that builds cash value over time based on the performance of a market index (like the S&P 500)—but with a built-in safety net that protects you from market losses.

With proper funding, an IUL can be used to generate tax-free income in retirement through policy loans—while also providing a death benefit to protect your loved ones.

Here’s what makes it powerful:

✅ Tax-free income withdrawals via policy loans

✅ Market-linked growth with zero downside risk

✅ No RMDs or age-based penalties

✅ Unlimited contributions (no IRS caps)

✅ Life-long coverage & legacy planning

401(k) vs. Indexed Universal Life (IUL) Policy

Feature	401(K)	Indexed Universal Life
Tax on Withdrawals	Taxable	Tax-free (via policy loands)
Contribution Limits	Yes	No IRS-imposed limits
Market Risk	Yes	No - Index-based with floor
Early Withdrawal Penalty	Yes (Before 59 1/2)	No
Required Minimum Distributions	Yes at age 73	No
Life Insurance Benefit	No	Yes

Real-World Strategy: Use Both (Smartly)

This isn’t always a one-or-the-other situation. Many of our clients use a hybrid strategy—maximizing employer 401(k) matching while building tax-free income and protection through life insurance.

The key is understanding how to structure and balance your retirement income sources for:

• Lower taxes

• Greater flexibility

• Long-term security

Let's Build Your Retirement Income Strategy

At New Sun Life Solutions Brokerage, we specialize in designing personalized retirement plans that go beyond the traditional 401(k). Whether you're in your 30s and building wealth or in your 50s and preparing for retirement, our team is here to help you explore your options.

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