29 Mar Tug of war between 401(k) and insurance

Q. In your recent story about whether life insurance is better than a 401(k), you left out taxes. Whole life insurance that is funded up to the maximum premium allowable with a minimum death benefit will outperform 401(k)s without the market risks and sequence of return risks. The federal government can raise taxes and everyone should plan for tax-free retirement income using Roth IRAs and capitalized whole life insurance.
— Reader

A. We’re not sure you’re seeing the big picture.

Yes, of course, the federal government could raise taxes so it’s important to plan for tax-free retirement income. No argument there.

But life insurance products and 401(k) plans are completely different animals, and there are benefits to both.

We took your comments to Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.
He said you sound like you’re a life insurance salesman.

“For the record, I am a fan of whole life insurance and have a whole life policy personally,” Lynch said. “I am also a fan of real estate, taxable investments, tax deferred investments, and a bunch of other things.”

He said he firmly believes that there is no one “best” product, and that each type of investment product has their advantages and disadvantages.

“I like the guarantees of whole life insurance, but I also love the tax benefits and leverage of real estate,” he said. “I like deferring income from a higher tax bracket into a lower tax bracket as well as the liquidity of taxable stock investments.”

Lynch said Roth IRAs are “terrific,” especially for young people whose income and tax bracket will increase over time.

He said he thinks the same as traditional 401(k)s and IRAs for people who are in a high tax bracket now, but will retire in a lower bracket in retirement.

“I don’t believe in blanket statements such as `will outperform’ and in fact, I am barred from saying that,” he said, noting past performance is not indicative of future results.

So yes, the government can raise taxes and lower taxes.

Right now families with $75,000 or less each year in taxable income qualify for tax-free capital gains and tax-free qualified dividend income, Lynch said.

And generally, he said, stocks outperform bonds by a substantial amount and generally whole life is invested in corporate bonds, he said.

“Just as bonds at some times (i.e. 2008) outperformed stocks substantially, stocks have generally outperformed bonds historically,” he said. “In the words of William Shakespeare, `Nothing is neither good or bad, thinking it makes it so!'”

So are there benefits to life insurance products? Of course. But they shouldn’t be the only apple in anyone’s retirement basket.

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This post was first published in March 2017.