When creating your personal retirement plan, there are a variety of tools you can use to fund your long-term savings goals. An employer-sponsored 401(k) is one of them, while indexed universal life insurance (IUL) is another. A 401(k) allows you to invest money on a tax-deferred basis while also enjoying a tax deduction for contributions. Indexed universal life insurance allows you to secure a death benefit for your loved ones while accumulating cash value that you can borrow against. Let’s review the differences between IUL vs 401k. A financial advisor can also help you use these vehicles to plan for your retirement.
What Is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance coverage. When you buy a policy, you’re covered for the rest of your natural life as long as your premiums are paid. When you pass away, the policy pays out a death benefit to your beneficiaries.
During your lifetime, an IUL insurance policy can accumulate cash value. Part of the premiums you pay are allocated to a cash-value account. That account tracks the performance of an underlying stock index, such as the Nasdaq or S&P 500 Composite Price Index. As the index moves up or down, the insurance company credits the cash value portion of your policy with interest.
IUL is different from fixed universal life insurance or variable universal life insurance. Here’s how.
- With fixed universal life insurance, your rate of return is guaranteed and risk is minimal.
- Variable universal life insurance invests your cash value account in mutual funds and other securities, exposing you to more risk.
- An indexed universal life insurance policy fits in the middle of the risk spectrum, since growth is tied to the performance of an underlying stock index.
Cash value that accumulates inside an IUL insurance policy grows tax-deferred. You can borrow against this cash value if necessary. However, any loans left unpaid at the time you pass away are deducted from the death benefit. It’s important to have a very strict financial plan if you want to borrow against that cash value.
What Is a 401(k)?
A 401(k) is a type of qualified retirement plan that allows you to set money aside for retirement on a tax-advantaged basis. Here’s an overview of how a 401(k) plan works.
- Contributions are deducted from your paychecks via an elective salary deferral and your employer can also offer a matching contribution.
- For 2025, the contribution limit for employees is $23,500. Workers over the age of 50 can contribute an additional $7,500 per year. Starting in 2025, those between the ages 60 and 63 will be eligible for a super catch-up contribution of $11,250.
- Employee and employer contributions grow tax-deferred and starting at age 59 ½, you can make penalty-free withdrawals.
- Any withdrawals made before age 59 ½ may be subject to a 10% early withdrawal penalty as well as income tax.
Traditional 401(k) contributions are made using pre-tax dollars. Any money you contribute is automatically deducted from your taxable income from the year. When you begin taking money out of your 401(k) in retirement, you’ll pay ordinary income tax on withdrawals. A Roth 401(k), meanwhile, is funded with after-tax dollars, and qualified withdrawals are tax-free.
Traditional and Roth 401(k) plans allow you to invest in a variety of securities, including mutual funds and exchange-traded funds. Target-date funds are also a popular option. These funds automatically adjust your asset allocation based on your target retirement date.
There’s no death benefit component with a 401(k). This is money you save during your working years that you can tap into in retirement. Unless you’re still working with the same employer, you’re required to begin taking minimum distributions from a 401(k) beginning at age 73 (or age 75 if you were born in 1960 or later)
Estimate your required withdrawals from a 401(k) or IRA using our free RMD calculator:
Required Minimum Distribution (RMD) Calculator
Estimate your next RMD using your age, balance and expected returns.
RMD Amount for IRA(s)
RMD Amount for 401(k) #1
RMD Amount for 401(k) #2
About This Calculator
This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.
For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.
*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.
Assumptions
This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.
This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.
However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.
For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.
This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.
Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.
SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.
Failing to take the proper RMD can trigger a tax penalty equivalent to 25% of the amount you were required to withdraw (10% if fixed within two years). Your RMD in a given year is based on your account balance from December 31 of the previous year. For example, if you need to figure out how much you must withdraw from your 401(k) to satisfy your 2025 RMD, you’ll need your account balance as of December 31, 2024.
You then divide the balance by the IRS distribution factor that corresponds with your age, which you can find on the IRS’s Uniform Lifetime Table.
IUL vs. 401(k): Which Is Better for Retirement Savings?

Indexed universal life insurance and 401(k) plans can both be used as investment tools for retirement. But there are some important differences to note.
With IUL, returns are tied to the performance of an underlying index. If the index performs well, then your policy earns a higher interest rate. If the index underperforms, on the other hand, your returns may shrink. Your insurance company can also cap the rate of return credited to your account each year, regardless of how well the underlying index does. For instance, you may have a cap rate of 3% or 4% annually.
In a 401(k) plan, you have the option to invest in index mutual funds or ETFs, but you’re not locked into just those investments. You can also choose actively managed funds, target-date funds and other securities, based on your time frame for investing, goals and risk tolerance. Your rate of return is still tied to how well those investments perform but there’s no cap. So, if you invest in an index fund that goes up by 20%, you’ll see that reflected in your 401(k) balance.
A 401(k) also affords the advantage of an employer-matching contribution. This is essentially free money you can use to grow retirement wealth. With an indexed universal life insurance policy, you’re responsible for paying all of the premium costs.
IUL vs 401k: Tax Treatment and Withdrawals
Another big difference between the two centers on tax treatment and withdrawals. With an indexed universal life insurance policy, you can borrow against the cash value at any time. You’ll pay no capital gains tax on loans and no penalties unless you surrender the policy completely or fail to repay what you borrow. Death benefits pass to your beneficiaries tax-free.
With a 401(k), you could technically take money out of your plan early for a hardship withdrawal or some other reason, but a 10% early withdrawal penalty may apply. The IRS allows some exceptions to this rule. For example, you can avoid the penalty if the withdrawal is for:
- Qualified medical expenses that exceed 7.5% of your adjusted gross income (AGI)
- Birth or adoption expenses
- Health insurance premiums paid while unemployed
- Buying a first home (up to $10,000)
- Qualified higher education expenses
- Disaster recovery
- Personal emergencies (up to $10,000)
The rule of 55 also allows for penalty-free withdrawals. This rule allows you to withdraw money from your 401(k) without the added penalty if the withdrawal occurs in the year that you turn 55 and only if you separate from your employer. You cannot use this rule to make penalty-free withdrawals from an old 401(k) with a previous employer.
With any penalty-free withdrawals from a traditional 401(k), you’d still owe income tax on the distribution. You could take out a 401(k) loan instead but that also has tax implications. If you separate from your employer with an outstanding loan balance and fail to repay the loan in full, the entire amount can be treated as a taxable distribution.
Qualified distributions in retirement are taxable at your regular income tax rate. If you pass away with a balance in your 401(k), the beneficiary who inherits the money will have to pay taxes on it. Talking with a tax professional or your financial advisor can help you come up with a plan for managing tax liability efficiently both prior to retirement and after.
When to Consider IUL as a Supplement to a 401(k)
A 401(k) is often the foundation of a retirement savings plan due to tax-deferred growth, employer matching and high annual contribution limits. However, indexed universal life insurance can serve as a secondary tool in specific situations. It may offer added flexibility, insurance protection and tax-efficient withdrawals that traditional retirement accounts do not provide.
- Maxed-out contributions: If you are already contributing the maximum to your 401(k) and IRA, and still want to save more in a tax-advantaged vehicle, an IUL can provide additional room for tax-deferred growth. Unlike retirement plans, there is no IRS-imposed annual limit on how much premium you can contribute, subject to policy guidelines.
- Income tax diversification: A 401(k) produces taxable income in retirement. Distributions are taxed at ordinary income rates. In contrast, loans from an IUL policy are generally tax-free if managed properly. Using both accounts together allows retirees to blend taxable and non-taxable income sources, which may help reduce the overall tax burden and manage marginal tax brackets.
- Early access to funds: A 401(k) limits access before age 59 ½, and early withdrawals may trigger penalties and taxes. An IUL does not have this restriction. Policy loans can be taken at any time without triggering taxes, provided the policy remains in force and is not surrendered. This feature may be useful for early retirees, self-employed individuals or those expecting variable income.
- Legacy planning and death benefit: A 401(k) has no built-in death benefit. Beneficiaries who inherit a 401(k) will owe taxes on withdrawals. An IUL includes a life insurance component, which pays a generally income-tax-free death benefit. This can support estate planning or create liquidity for heirs.
- No required minimum distributions (RMDs): A 401(k) requires minimum distributions starting at age 73. An IUL has no such requirement. Policyholders can choose whether and when to access cash value, which adds flexibility in managing withdrawals and taxes during retirement.
There are some potential drawbacks to keep in mind, however.
Despite the benefits, IUL policies come with costs. Administrative fees, mortality charges, and surrender penalties can reduce returns. The growth of the cash value is subject to index caps and participation rates. If premiums are not maintained or loans are mismanaged, the policy could lapse, triggering tax consequences and loss of coverage.
An IUL should generally not replace a 401(k) but may be used to complement one—particularly for high earners, those with strong cash flow, or individuals seeking insurance-based tax strategies alongside their retirement plan.
Bottom Line

Indexed universal life insurance and a 401(k) plan can both help you build wealth for retirement, but they serve different purposes in your financial plan. If you have a 401(k) at work, this may be the first place to start when creating a retirement savings plan. You can then decide if IUL or another type of life insurance is needed. It could supplement your workplace savings, as well as the money you’re investing in an IRA or brokerage account.
Retirement Planning Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s retirement calculator to get a sense of if you’re on track to be ready.
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