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Do I Need Life Insurance if I Have a 401(k)?

Financial Wellness

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3 min Category: Financial Wellness

There are multiple ways to plan for your family’s financial future. Two of the most popular ways are through a 401(k) or life insurance. In 2021, roughly half of all Americans had life insurance, and roughly one-third of Americans invested in a 401k. But how do you know which one is right for you? If you have one, do you need the other? While everyone’s situation is different, here is some helpful information to help you determine the best way to secure your family’s financial future.

What is a 401k?

A traditional 401(k) plan is a retirement savings and investment plan that allows eligible employees to make pre-tax elective deferrals through payroll deductions. In addition, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. Generally, if you take a distribution from a 401k before age 59 ½, you will likely owe both federal income tax and a penalty on the amount that you withdraw.

What is Life Insurance?

The two most popular types of life insurance are Term Life Insurance and Whole Life Insurance. Term Life Insurance is temporary protection because it only provides coverage for a specific period of time. There is usually a maximum age above which coverage will not be offered or at which coverage cannot be renewed. Whole Life Insurance (or Permanent Insurance) is a general term used to refer to various forms of life insurance policies that build cash value and remain in effect for the entire life of the insured (or until age 100) as long as the premium is paid.

What is the Difference Between Term Life Insurance and Whole Life Insurance?

Term Life Insurance covers you for a fixed period of time and pays out if you die during the term. It provides the greatest amount of coverage for the lowest premium as compared to other forms of protection. However, if your policy is canceled or expires prior to your death, your beneficiaries will not receive any money. There is no cash value or other living benefits.

On the other hand, Whole Life Insurance provides lifetime protection and includes a cash value. Whole life insurance is usually more expensive than Term Life Insurance because of these reasons.

What Are the Benefits of a 401(k) that Life Insurance Doesn’t Offer?

When you put money into a 401(k), it decreases your taxable income for the year. In addition, your company might match each dollar you put into your 401(k) up to a certain percentage of your income. Your employer will usually not match any portion of your life insurance premiums. In addition, the cash value in whole life insurance garners a 1.5% to 3.5% yearly return, the average yearly return for a 401(k) is 5% to 8%.

What Are the Benefits of Life Insurance that a 401(k) Doesn’t Offer?

Life insurance is designed to provide for your family if the unthinkable were to happen to you. A 401(k) is typically used for retirement.

How Do I Choose Between a 401(k) or Life Insurance?

Hopefully, you won’t have to. A 401(k) will help provide for your family while you’re alive, and life insurance will help provide for your family after death. Both options will help provide you with the financial peace of mind that your family will be taken care of after you’re gone.

Join WAEPA Today

You can apply for Group Term Life Insurance at any time of the year (no Open Season or qualifying life event required). After more than 75 years of serving Civilian Federal Employees, WAEPA is the life insurance choice of over 46,000 Feds and their families. Calculate how much coverage you should consider and apply today.

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