Using Whole Life Insurance as a Roth IRA

Would you like to contribute to a Roth IRA but cannot due to high-income limitations? Are you making maximum contributions to a Roth IRA and wish you could contribute more? Would you like to have a source of tax-free income in retirement? Would you like to pass something to your heirs’ income tax-free? If you answered YES to any of these questions, perhaps Whole Life Insurance would be just the thing for you.

While a Roth IRA and Whole Life Insurance share several important attributes, whole life insurance offers features that are not available with a Roth IRA. First, contributions to both are made with after-tax dollars. However, annual contributions to a Roth IRA are limited to $6000.00 ($7000.00 for Age 50 and over) plus if you make a certain amount of income, you could be ineligible to contribute.  Most Whole Life Insurance policies will usually allow for extra premium payments which are greater than Roth IRA contributions.

A second characteristic shared by a Roth IRA and Whole Life Insurance is the contributions to each grows on a tax-deferred basis.  This is a great way to build wealth free of taxes.  There is a difference between the two on how the contributions are invested. Most Roth IRA contributions are invested in mutual funds which are subject to market risk which, in turn, will cause the value of the account to fluctuate.  On the other hand, premiums paid to a whole life insurance policy are put into interest-paying investments that provide a fixed rate of return free of market volatility. This return is the policy’s cash value and compounds over time.

A third shared feature between a Roth IRA and Whole Life Insurance is that the distributions from each is tax-free.  After age 59 ½ and the Roth IRA has been in existence for five-years, distributions are tax-free. Distributions can be taken from  Whole Life Insurance at any time as a tax-free loan as long as there is cash value to cover it and the policy is in-force.*  In addition, life insurance companies will occasionally return some of their profits to their whole life policyholders as dividends.  These dividends are considered the return of premium and by IRS rules are tax-exempt.

A final hallmark of both a Roth IRA and Whole Life Insurance is each has a beneficiary feature.  When a Roth IRA is opened, the account owner must name a beneficiary (usually a spouse) if he/she passes away.  However, a Roth IRA is included in the account owner’s gross estate and could be subject to federal and state estate taxes where applicable. Whole Life Insurance pays a tax-free death benefit to the insured’s beneficiary.  

When deciding on whether to use Whole Life Insurance instead of or in conjunction with a Roth IRA, you need to consider your present and future tax situation, goals, and estate plan. An advisor, a tax professional, and estate attorney will all prove useful in this decision.

* If Tax-Free Loans are taken and the policy lapses, a taxable event may occur.

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.  

(Life Insurance Benefits could be subject to the claims paying ability of the Life Insurance Company.)

Disclosures: 1. Life Insurance Cash Values Grow Without Being Subject to Current Taxation. Dividends are Not Guaranteed.  Certain conditions apply if the policy is classified as a Modified Endowment Contract.  Always Consult a Tax Professional regarding your personal situation to determine the suitability of the use of whole life insurance.