While a Roth IRA is a good option for retirement planning because of its favorable tax treatment that allows after-tax contributions, tax-deferred growth, and tax-free distributions at retirement, it has limitations.

For example, perhaps you’ve maximized your Roth IRA plan annual contribution and still want to save more, or your income may be too high for you to be eligible for a Roth IRA. Or, perhaps you maxed out your 401(k) and want to save more for retirement, but you’re not sure how.

Consider cash value life insurance—a type of permanent life insurance that includes a savings component. While many use life insurance for its death benefit, in recent years cash value life insurance has become a popular planning strategy among those seeking to maximize their tax-free income during retirement.

How Does This Strategy Work?

Depending on the type of policy you purchase, the cash value could grow at a fixed or variable interest rate over time. You may be able to borrow against the policy's cash value via a tax-free loan to help fund retirement.

If you pass away prematurely, your beneficiary typically receives only the death benefit (tax-free). However, there are some policies that can be purchased with an increasing death benefit option, which will grow as your cash value grows, allowing for a larger death benefit than originally purchased.

Comparison Between Roth IRA and Cash Value Life Insurance

The chart below shows how cash value life insurance offers similar benefits as a Roth IRA:

How Cash Value Life Insurance Differs

While there are similarities between a Roth IRA and cash value life insurance, there are also important distinctions:

• Life insurance doesn’t have income limitations like a Roth IRA. A married couple filing jointly with income of $218,000 (for 2023) or above can’t directly contribute to a Roth IRA.³
• Roth IRA annual contribution limits for 2023 are $6,500 ($7,500 for those 50 and older).⁴ Whereas life insurance policies can be structured to accept much more than $7,500 in annual premiums—a significant benefit if you’re trying to catch up and build substantial savings before you retire.
• Roth IRA contributions may be subject to market risk depending on the investment options you selected. Therefore, if the markets are down, your Roth IRA values could go down, too. You can own permanent life insurance policies that never decrease in value and are not subject to market volatility.
• Life insurance provides a tax-free death benefit. This feature provides financial assistance during times of need and may provide additional funds to help fulfill financial goals.
• There are restrictions on when and how you can get earnings out of a Roth IRA. With cash value life insurance, you can access your available policy values when you need them, without penalty.

Other Considerations to Keep in Mind

• Cash value life insurance comes without many of the limitations of a Roth, but you will have to wait until the cash value in the policy builds up substantially before taking tax-free withdrawals.
• Once a substantial cash value has accumulated, you are free to begin making tax-free withdrawals from the policy even if you have not yet reached age 59½. These withdrawals do not have to be repaid into the policy, but they reduce the policy death benefit.
• You also have the option of purchasing a high death benefit policy. If you plan to use cash value life insurance for retirement income planning, you should plan on keeping the policy well-funded because it is important that the policy remain active until death. Surrendering the policy early or allowing it to lapse can leave you with significant penalties or a large tax bill.
• There are other charges associated with a life insurance policy, including, but not limited to, a frontend load, administrative fees, investment management fees, cost of insurance charges, and charges for optional benefits selected.
• Like all life insurance contracts, your health will be considered as part of the underwriting process.

Whether or not you purchase a cash value life insurance policy will depend on how much risk you want to assume and how much flexibility you want to have. Carefully review all the features, benefits, and costs of a cash value life insurance policy with your Financial Advisor—and compare it to the advantages of a Roth IRA—before making this decision.