Roth IRA Vs. Variable Life Insurance

Both Roth IRAs and variable life insurance offer tax-sheltered investment growth.
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While putting in extra-long work weeks during your 20s and 30s, retirement can seem a far-off dream that will never become reality. And of course, you're still young and invincible, so your not likely to think too much about providing for loved ones after you have died. However, by starting early and using tax-advantaged accounts, such as Roth IRAs and variable life insurance, you can help to secure your retirement and dependents.

Tax Implications

A Roth IRA allows you to contribute after-tax money to the account. Then, the money grows tax-free in the Roth IRA until it is withdrawn. If the withdrawal occurs after the account has been open five years and you are at least 59 1/2 years old, the withdrawals are tax-free, as of publication. When you die, your beneficiaries inherit the funds in the account and, assuming the account has been open for five years, can remove the money without paying any taxes.

Variable life insurance premiums are not deductible from income tax. As you make payments, you build a basis in the account equal to the amount of your payments. Your basis becomes significant when you withdraw the cash value of your policy. As long as your distribution is less than your basis, you can remove the money without paying taxes on it. However, if your distribution exceeds your basis, the excess is taxable. Also, when the life insurance policy pays out the proceeds to your beneficiaries, those proceeds are not taxable regardless of your basis.

Investment Options

You can invest the money with any financial institution offering Roth IRAs, utilizing almost any investment option. Only a few investments, such as collectibles, are prohibited. Also, if you think you have found a better investment option, you can move the money to a different financial institution. With variable life insurance, you must select a mutual fund offered by the insurance company with which you have the policy. In addition, it is much harder and more costly to change insurance companies.

Contribution Limits

Roth IRAs are subject to annual contribution limits, which restrict how much money you can put in each year. As of 2012, you can contribute the smaller of $5,000 ($6,000 if 50 or older) or your annual compensation, which includes wages and salaries, but not investment income. Variable life insurance does not have the same contribution restrictions so individuals can take out whatever size policy they believe best fits their needs and that they can afford.


With a Roth IRA, your account value depends on how much you put in and how well the investments perform. Roth IRAs offer no guarantees on how much money you will receive on a future date. If you are concerned that your loved ones might be left without means to survive if you died suddenly, a Roth IRA might not be your best option. With a variable life insurance policy, your beneficiaries are guaranteed a specific death benefit when you die. However, the cash value of the insurance policy is not guaranteed. Like the Roth IRA, if your investments perform well, your cash value will increase. However, poor performing investments limit the cash value.

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