What are the advantages / disadvantages of owning a whole life insurance policy withing a 401k plan???
What are the advantages / disadvantages of owning a whole life insurance policy withing a 401k plan??? Advantages - None. none, none...There might be some but none that I can think of.
mwhaag, you asked:<< What are the advantages / disadvantages of owning a whole life insurance policy withing a 401k plan??? >>Advantages: An income that can NOT be outlived by way of annuity installments the cash value accumulations. The leverage of the "Death Benefit" should you die - e.g. if you're married and you die before you accumulation much of anything, you spouse will have the death benefit and won't have to accumulate anything inside a tax sheltered plan. The premiums for the life insurance contract are paid on a pre-tax basis.Disadvantages: Life insurance has a COST which, as an expense, reduces your investment performance. A Whole Life contract (as opposed to a Variable Life contract of some sort) cab at best produce 6% to 8% rate of return. Whole Life contracts are only best used as one's conservative element of the asset allocation model. The Death Benefit within a 401(k) then becomes fully income taxable to the 401(k)s beneficiary (Normally, death benefits of life insurance is NOT income taxable).Note There is not pat answer or one answer that fits all with regard to whether or not a life insurance contract can work well for some situations. The above "advantages" and "disadvantages" depends on just what one is trying to accomplish and what one's particular situation is. It really takes a details analysis by someone who really understands the tax implications as they are applied to a particular individual's situation.
Keep in mind that a life insurance contract already includes some tax deferral (which the insurance company is charging you for the convenience). The 401(k) is a government-granted tax deferral; Uncle Sam doesn't charge you for this. So by putting a life insurance contract in a 401(k) you're paying for tax deferral you're not using.Also, consider the opportunity cost. Every dollar paid into the life insurace plan is a dollar that can't be invested into stocks.
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