IUL vs 401(k): Which Retirement Strategy Is Better?
Written by
Angela Mae
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Joe Evans
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When it comes to saving for retirement, you might wonder whether an Indexed Universal Life (IUL) insurance policy or a 401(k) is the smarter move. Both can help you grow wealth over time, but they serve different purposes and come with unique tax rules, costs and benefits.
If you’re deciding between the two — or considering combining them — here’s how to compare IUL vs 401k and determine which strategy best fits your financial goals.
Quick Facts: IUL vs 401(k)
| Feature | IUL (Indexed Universal Life Insurance) | 401(k) Retirement Plan |
|---|---|---|
| Purpose | Life insurance with investment growth | Employer-sponsored retirement savings |
| Tax Treatment | Tax-deferred growth, tax-free death benefit | Tax-deferred (traditional) or tax-free (Roth) growth |
| Contribution Limit (2025) | No formal IRS limit | $23,500 + $7,500 catch-up (50+); up to $70,000 with employer match |
| Growth Basis | Linked to market indexes (e.g., S&P 500) | Based on fund performance (stocks, bonds, ETFs) |
| Best For | High earners seeking tax diversification + estate planning | Employees seeking consistent, tax-advantaged retirement savings |
Source: IRS, Schwab, Fidelity
What Is an IUL (Indexed Universal Life Insurance)?
An Indexed Universal Life (IUL) policy is a type of permanent life insurance that combines lifelong coverage with a cash value account tied to a stock market index like the S&P 500.
You can adjust both premiums and death benefits over time, making it flexible — but also more complex than traditional term life insurance.
How It Works
Part of each premium funds your life insurance coverage, while the rest builds cash value that grows based on market performance. If the index rises, your cash value increases (up to a capped limit). If the market falls, your account typically has a guaranteed minimum interest rate to limit losses.
According to LIMRA, IUL new premiums represented 24% of the total U.S. life insurance market in 2024, reflecting growing popularity among affluent savers looking for flexible growth and protection.
Tax Benefits
- Tax-deferred cash value growth
- Tax-free death benefit for beneficiaries
- No capital gains tax on loans or withdrawals
- Policy loans allow access to the cash value without early withdrawal penalties
Drawbacks
- High administrative and premium costs
- Growth caps limit potential market gains
- Overborrowing can cause a policy lapse
- No exposure to dividends from underlying stocks
- Complex structure that requires active management
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan that lets you save and invest part of your income for the future. Contributions are either pre-tax (traditional) or after-tax (Roth 401(k)), depending on the plan your employer offers.
According to the U.S. Bureau of Labor Statistics, 70% of private-sector workers had access to a defined contribution retirement plan in March 2025, and about 73% of those with access chose to participate — making it one of the most common retirement tools in the U.S.
Key Benefits
- Employer matching contributions — essentially free money
- Automatic payroll deductions make saving effortless
- Tax-deferred or tax-free growth, depending on plan type
- Compounding growth accelerates long-term wealth
Contribution Limits for 2025
- $23,500 annual limit
- +$7,500 catch-up for those age 50+
- +$11,250 catch-up for ages 60-63 (SECURE 2.0 Act)
- $70,000 total combined employer + employee contribution limit
Drawbacks
- Early withdrawals before 59½ face a 10% IRS penalty
- RMDs (required minimum distributions) start at age 73
- Investment growth is subject to market risk
IUL vs 401(k): Key Differences at a Glance
| Feature | IUL (Indexed Universal Life Insurance) | 401(k) Retirement Plan |
|---|---|---|
| Purpose | Combines life insurance protection with investment growth potential | Employer-sponsored plan for long-term retirement savings |
| Contribution Limits | No formal IRS contribution limit; based on policy structure and premiums | $23,500 annual limit in 2025, plus $7,500 catch-up for age 50+ and up to $70,000 total with employer match |
| Growth Potential | Linked to stock market indexes like the S&P 500, with minimum guarantees and capped returns | Based on investment choices — mutual funds, ETFs or target-date funds — with no cap on growth |
| Tax Treatment | Tax-deferred cash value growth and tax-free death benefit for beneficiaries | Traditional 401(k): tax-deferred growth; Roth 401(k): tax-free withdrawals in retirement |
| Fees and Costs | Higher fees for insurance coverage, administration and potential surrender charges | Lower administrative and investment management fees |
| Liquidity | Access funds via policy loans (no early-withdrawal penalty, but may reduce death benefit) | Withdrawals before age 59½ usually incur a 10% IRS penalty and income tax |
| Risk Level | Moderate — limited downside but capped upside | Market-based — higher growth potential with greater volatility |
| Best For | High-income earners seeking tax diversification and estate-planning advantages | Workers focused on steady, tax-advantaged retirement savings and employer-matched growth |
Sources: IRS (2025 contribution limits), Fidelity Retirement Insights, Schwab Investment Research
When Does an IUL Make Sense?
An IUL can be a strong addition to your portfolio, but usually after you’ve maxed out your 401(k) and IRA contributions.
1. For High-Income Earners
If you’re already contributing the maximum to your 401(k) or IRA, an IUL provides another way to grow money tax-deferred. There’s no official IRS cap, and you can tailor contributions to your income level.
2. For Estate Planning and Tax Diversification
An IUL offers tax-free benefits and estate planning flexibility that 401(k)s can’t. The death benefit can help offset estate taxes or leave an inheritance.
3. For Lifelong Coverage + Cash Value Growth
An IUL provides permanent life insurance and cash accumulation, with funds you can access in retirement without triggering penalties.
When a 401(k) Is the Smarter Choice
1. When You Have Employer Matching
Employer-matched contributions are essentially “free money.” Always maximize your 401(k) contributions to the match before considering other vehicles.
2. When You Want Simplicity
401(k)s are easier to manage, with fewer moving parts and lower fees than IUL policies.
3. When Growth and Liquidity Matter
You can change investments within your plan, take loans, and benefit from long-term compounding — giving 401(k)s more flexibility for active savers.
Schwab’s 2024 Retirement Study found that workers who consistently contribute to a 401(k) with employer matching are 50% more likely to meet their retirement goals than those relying on insurance-based plans alone.
Can You Combine Both Strategies?
Absolutely. For many affluent savers, the best approach isn’t IUL vs 401k — it’s IUL and 401(k).
Use 401(k) for Growth and Matching
Max out your 401(k) for tax-deferred savings, employer matching and consistent compounding.
Use IUL for Tax-Free Withdrawals Later
In retirement, policy loans from an IUL can provide tax-free income that offsets taxable 401(k) distributions.
Diversify Across Account Types
Combining a 401(k), IUL, and Roth IRA can balance taxable and tax-free income sources in retirement. Use a retirement calculator to model how both accounts can work together.
Final Take to GO: Which Is Better — IUL or 401(k)?
The IUL vs. 401(k) debate isn’t about choosing one over the other — it’s about knowing your goals. For most people, a 401(k) should come first for the tax advantages and employer match. But for high earners seeking tax-free income and estate planning benefits, an IUL can complement — not replace — a 401(k).
Before making changes to your retirement strategy, talk with a fiduciary financial advisor or certified planner who can help you balance growth, protection and tax efficiency for your long-term goals.
Final Take: If you can afford both, use your 401(k) for growth and your IUL for protection and flexibility — a combination that keeps you covered from every angle.
FAQ
Here are answers to some of the most frequently asked questions about IUL vs 401(k) plans and how they fit into your retirement strategy:- Can I have both an IUL and a 401(k)?
- Yes. Many high earners use both. A 401(k) helps you build tax-deferred savings with employer matching, while an IUL adds tax-free income and life insurance protection. Together, they create tax diversification and long-term flexibility.
- Is an IUL better than a 401(k) for retirement?
- Not necessarily. A 401(k) usually comes first because of the employer match and simple growth potential. An IUL may make sense after you’ve maxed out 401(k) and IRA contributions, especially if you want estate planning benefits or tax-free income later.
- What are the tax benefits of an IUL?
- An IUL offers tax-deferred cash value growth and tax-free death benefits. You can also access funds through policy loans without paying early withdrawal penalties or capital gains taxes, though borrowing too much could reduce your policy’s value.
- What are the contribution limits for an IUL vs a 401(k)?
- A 401(k) has strict annual IRS limits -- $23,500 in 2025 plus catch-up contributions. IULs don’t have formal IRS limits, but contributions depend on policy terms and your premium structure.
- Who should consider an IUL?
- IULs typically suit high-income earners or those focused on legacy planning. If you’ve already maxed your 401(k) and IRA, an IUL can offer another way to grow wealth while providing life insurance coverage and tax advantages.
- What are the downsides of IULs compared to 401(k)s?
- IULs come with higher fees, growth caps, and more complexity. 401(k)s, on the other hand, are easier to manage, cost less and offer higher potential returns if invested wisely over time.
- How do I decide which option fits my goals?
- Start with your 401(k) to take advantage of employer matching and tax-deferred growth. If you want additional tax-free income and estate planning flexibility, consider adding an IUL after maximizing traditional retirement accounts.
Information is accurate as of Oct. 22, 2025.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Charles Schwab "2024 401(k) Participant Survey"
- U.S. Bureau of Labor Statistics "Employee Benefits in the United States Summary"
- LIMRA "U.S. Individual Life Insurance Premium Sets New Sales Record in 2024"
