Whole life insurance, which is also called permanent life insurance, and Roth IRAs, which is a variation on the traditional individual retirement account, are two types of financial vehicles that frequently are used in retirement planning. Each can be adopted to provide a source of regular income in retirement, ideally supplementing other sources such as pensions and Social Security benefits.
With both whole life insurance and the Roth IRA, the investor contributes to an account with the option of withdrawing funds at a later date. For whole life insurance policies, those contributions come in the form of premium payments. The payment amounts are set by the policy, not by the investor, but the investor can over-fund the account, contributing more than the premium payments to it. Roth IRAs do not require payments. In fact, a Roth IRA owner can simply not contribute to it once it has been established with an initial infusion of funds. However, owners frequently schedule regular contributions.
The value of a whole life insurance policy grows based on the value of the premiums paid and a guaranteed interest rate established at the time of purchase. Policies from mutual life insurance companies sometimes also have a dividend, and those policies tend to produce a higher rate of return. The longer the holder possesses a whole life policy and contributes to it, the larger the policy's cash value becomes. With a Roth IRA, the account owner's contributions are invested in investments such as stocks and bonds, which are designed to increase the value of the account.
Roth IRA Distribution
Withdrawing funds from a Roth IRA can be done tax free, as long as the withdrawal counts as a qualified distribution. This differs from a traditional IRA, for which withdrawals are taxed. To ensure that a distribution qualifies as tax free, it must be made after the account holder is age 59 1/2. If the account holder withdraws funds from the account before then, the distribution is accompanied by a 10 percent tax penalty. There are exceptions to this requirement, including the purchase of a first home, large medical expenses, disability or higher-education expenses.
Life Insurance Withdrawal
Owners of whole life insurance policies can withdraw funds from the accounts, although it takes years of contributions before an account tends to provide much significant income. Whole life insurance accounts grow tax-deferred with the premium payments that fund them, but the ultimate distributions of the funds are only tax free if the account holder withdraws the money as a loan against the death benefit that the policy carries. Taking distributions from the cash value of a whole life policy reduces the value of the death benefit. Whole life policies tend to allow distributions that are in a lump sum or handed out annually.
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