Comparing IUL vs. 401k for Retirement

Which Is Best for Your Retirement Goals

Retired couple at a lake

Hero Images / Getty Images

If you’re like most Americans, you’ve heard of a 401(k). Indexed Universal Life Insurance (IUL), on the other hand, is much more of a mystery to the average American. They have their similarities, but they have a lot of differences, as well. Make sure you fully understand what an IUL is and how it could fit into your retirement planning before you sign up for a policy.

IUL or Indexed Universal Life Insurance

An IUL, or indexed universal life insurance, is a type of universal life insurance policy. Universal policies have flexible premiums. The death benefit, savings feature, and premium can also be altered throughout the course of the contract.

One of the most important parts of indexed universal life policies is the cash component. Think of the cash component as a way for the policy to act like an investment product. The insurance company puts it to work by tying it to an index in the stock market. Either you choose from a menu of indexes, or the insurance company makes the choice.

Let’s assume you picked the S&P 500. If the S&P 500 goes up a certain percentage, the cash value of your policy goes up a certain amount—although usually not the same amount as the index. IULs generally have a cap on the upside of the investment. For example, in a year like 2017, when the S&P 500 gained more than 20%, an IUL might have only returned a 12% gain for the year, depending on the policy terms.

On the other hand, if the S&P has a year like 2008, when it was down 37%, IUL holders don't lose much sleep because the cash component of their policy doesn't decline at all. Certain policies may even post a small gain during tumultuous times for stocks. You won’t get all of the upsides of a stock market rally with an IUL, but you’re protected from the downsides of a stock crash. That’s why it's an insurance policy.

If you dig into the fine print, you might also see the phrase, “point to point.” This means, instead of looking at the index’s performance each day and applying those gains or losses to your IUL, the insurance company will look at the performance at certain intervals. If it’s an annual point-to-point, it doesn’t matter what the index did throughout the year. The insurance company will only look at the index’s performance on a specific day and compare that to exactly one year before. This strategy may or may not work in the policyholder’s favor, it depends on the market.

Further, part of the gains of the S&P 500 includes a dividend. In 2017, the dividend accounted for about 3% of gains. IULs don’t usually pay the dividend portion of the gains.


A 401(k) gets its name from the tax code that it's tied to. Most people become eligible for a 401(k) when they become employed by a company that offers one. Some portion of their paycheck goes into their 401(k) along with a company match (if the company offers one). The employee can pick how the money is invested from a small menu of investment options. There are different types of 401(k)s—such as a Roth 401(k), where taxes are paid upfront, and a traditional 401(k), where the money is invested on a pre-tax basis and taxed later in life when the money is withdrawn.

IUL vs. 401(k)

Before making a decision, it's best to read more about how each product works and consult with a professional, but here are some key differences between the IUL and the 401(k):

IULs are insurance policies—401(k)s are investment products. Insurance policies are designed to offer protection, while investment products have the goal of growing your net worth. Insurance policies and investments should be used together, but some financial advisers recommend keeping them separate. IULs offer both insurance and investment gains, but the 401(k) may offer the investment gains at a lower cost. There’s no earnings cap on a 401(k), but there’s also no protection from loss.

IULs may be more difficult to understand. All financial products are difficult to understand to some extent, but insurance policies often have so many options and pages of fine print that consumers are at the mercy of their insurance agents. The details and inner workings of 401(k) plans are complicated, but the overall process of investing with them is more straightforward and easy to understand.

They're taxed differently. The cash value of IULs can be accessed at any time because it’s already taxed. Most 401(k)s are different. For example, you have to be 59½ before withdrawing any money, and you have to take required monthly distributions once you reach a certain age. Failing to follow rules like these could result in a tax penalty. If you have a Roth 401(k), the rules are more relaxed, but it's still important to know and follow any IRS rules.

IULs are simpler for estate planning. While 401(k)s are subject to probate, beneficiaries get a tax-free death benefit with an IUL.

Employers may contribute to your 401(k). Many employers match 401(k) contributions for employees. Employers seldom, if ever, contribute to an IUL.

Ask for Help

401(k)s get a lot more financial media attention than IULs, so you probably have a better understanding of how a 401(k) works already. IULs are complicated, and they come with a lot of options. That's why, if you're considering one, it's best to find an insurance professional who can help you evaluate your options. This professional should be a third party, without any skin in the game, so you can receive objective advice.