IUL vs. ROTH IRA:
Which Actually Builds More Wealth? (PART ONE)
Welcome to part ONE of this THREE part article series where we deep dive into the two most debated topics in the retirement world. IUL or Roth IRA?
When it comes to building long-term wealth, choosing between an IUL vs Roth IRA can feel like navigating a complex financial maze. Both options promise tax advantages and growth potential, but they work in fundamentally different ways.
While Roth IRAs offer direct market exposure and straightforward contribution rules, Indexed Universal Life policies provide unique features like downside protection and flexible premium payments. However, each comes with its own set of costs, risks, and potential rewards that could significantly impact your financial future.
Whether you're planning for retirement or looking to build generational wealth, understanding these differences is crucial. Let's examine how these two investment vehicles actually perform, their true costs, and which might be the better choice for your financial goals.
Still have questions? We'd love to talk to you.
Understanding IUL and Roth IRA Basics
Indexed Universal Life (IUL) and Roth IRA represent distinct approaches to building wealth, each offering unique features and benefits for long-term financial planning.
What is an Indexed Universal Life Policy?
An IUL combines permanent life insurance coverage with an investment component that tracks market performance. The policy splits premium payments between insurance costs and a cash value account (1). The cash value portion earns interest based on the performance of a stock market index, such as the S&P 500, although the money isn't directly invested in the market (1).
A distinctive feature of IUL policies lies in their cap and floor rates. The floor rate, typically set at 0%, ensures protection against market downturns by guaranteeing a minimum interest rate 1. Conversely, the cap rate limits the maximum return in a given period 1. Additionally, IUL policies offer flexible premium payments within certain limits based on financial circumstances (1).
How Roth IRA Works
A Roth IRA functions as a retirement account funded with after-tax dollars, allowing investments in stocks, bonds, mutual funds, and other securities (2). For 2025, single filers must have a modified adjusted gross income (MAGI) below USD 165,000 to contribute, whereas married joint filers face a limit of USD 246,000 (3).
The annual contribution limits for 2025 stand at USD 7,000, with an additional USD 1,000 allowed for those 50 or older 2. Unlike traditional IRAs, Roth IRAs permit tax-free withdrawals of contributions at any time (2). Nevertheless, earnings withdrawals before age 59½ or within five years of opening the account typically incur penalties 2.
Key Differences at a Glance
The fundamental distinctions between IULs and Roth IRAs encompass several key aspects:
- Investment Structure: IULs link returns to index performance with built-in protections, whereas Roth IRAs offer direct market exposure through various investment options 3. Furthermore, IULs provide downside protection through minimum guaranteed rates, although caps may limit potential gains 3.
- Contribution Flexibility: IULs stand out with no annual contribution limits (3). In contrast, Roth IRAs maintain strict contribution limits and income eligibility requirements (3).
- Tax Treatment: Both options utilize after-tax dollars for contributions. Nevertheless, IULs offer tax-free loans against cash value and tax-free death benefits to beneficiaries 1. Similarly, Roth IRAs provide tax-free qualified withdrawals after meeting specific age and holding period requirements (2).
- Access to Funds: IUL policies allow loans or withdrawals against cash value, though these actions may affect the death benefit (1). Alternatively, Roth IRAs permit penalty-free withdrawal of contributions anytime, with stricter rules governing earnings withdrawals (2).
- Estate Planning: IULs include a death benefit component paid tax-free to beneficiaries (1). Meanwhile, Roth IRAs pass remaining account values to heirs, requiring non-spouse beneficiaries to withdraw funds within specific timeframes (3)
Still have questions? We'd love to talk to you.
Comparing Growth Potential
The growth potential between IULs and Roth IRAs stems from their distinct approaches to market participation and investment strategies.
Market Returns vs Index Credits
IULs offer a unique balance of growth opportunity and protection through their index-based crediting system. During market volatility, IULs demonstrated superior performance by preventing losses while capturing market gains. In fact, a comparative analysis showed IULs generated USD 16,327,611 versus the Roth's USD 5,025,422 - resulting in an USD 11,302,189 advantage (4).
The annual point-to-point indexing structure of IULs creates more reliable compound growth over time (4). Specifically, IULs implement a floor rate, typically at 0%, protecting the cash value from market downturns (5). Yet, this protection comes with a trade-off - most IUL policies cap annual returns at approximately 11% (6).
Roth IRAs, alternatively, provide direct market exposure through diverse investment options. Without performance caps, Roth investments can fully participate in market rallies (7). Still, this unrestricted growth potential exposes retirement savings to market volatility, particularly during economic downturns (4).
TO BE CONTINUED...
Come back next week to continue with part two of this mini article series. See you then!
Still have questions? We'd love to talk to you.
Laura Munoz, Senior Advisor with Financial Advantage Consultants
References
[1] - https://ogletreefinancial.com/blog/roth-ira-vs-indexed-universal-life-whats-the-best-choice/
[2] - https://investorlosscenter.com/iul-fees-explained/
[3] - https://www.investopedia.com/fees-roth-ira-5220092
[4] - https://www.insurancegeek.com/iul/iul-vs-roth-ira/
[5] - https://www.annuityexpertadvice.com/iul-vs-roth-ira/
[6] - https://www.capitalforlife.com/iul-vs-roth-ira
[7] - https://smartasset.com/retirement/iul-vs-roth-ira
[8] - https://www.nationallife.com/resource-center/indexed-life-insurance-volatility-controlled-indexes
[9] - https://www.modernlife.com/article/indexed-universal-life-insurance-benefits-risks
[10] - https://www.zagconsultgroup.com/blog/iul-vs-roth-ira
[11] - https://www.investopedia.com/articles/personal-finance/103114/roth-iras-investing-and-trading-dos-and-donts.asp
[12] - https://www.nasdaq.com/articles/how-protect-your-roth-ira-stock-market-crash
[13] - https://www.healthcareretirementplanner.com/2023/09/18/indexed-universal-life-vs-roth-ira/
[14] - https://www.aol.com/protect-roth-ira-stock-market-200025458.html
[15] - https://ogletreefinancial.com/blog/tax-treatment-of-iul-cash-value/
[16] - https://thequantum.com/doing-roth-conversions-for-your-clients-consider-an-iul-alternative/
[17] - https://azewebp03sa.blob.core.windows.net/ashbrokerage-web/uploads/40086-Cost-Transparency-How-IUL-Policy-Charges-Work.pdf
[18] - https://bankingtruths.com/indexed-universal-life-insurance-pros-cons/
[19] - https://youstaywealthy.com/podcasts/why-iul-is-a-bad-investment/
About the Creator
Laura E. Munoz
Sr. Advisor at Financial Advantage Consultants, specializing in 403(b)'s, tax advisory, rollovers, IRAs, Roth IRAs, financial planning, Wills, and Trusts. Backed by 50+ years of team expertise, helping clients secure their financial future.
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The path was narrow and uneven, yet it carried him faithfully, never asking where he was going or why. In its quiet presence, he found a strange comfort. Aamir was not unhappy in the usual sense. He had food, family, and education. He taught children in the village school and was respected by many. Yet inside him lived a deep confusion — a soft but constant question: Am I becoming what I was meant to become? He had dreams once — of writing, of speaking beautifully, of guiding others not only through lessons but through life itself. But responsibilities had grown faster than courage. Slowly, without noticing, he had begun to doubt himself. And doubt, unlike pain, does not shout. It whispers. On one such morning, when the mist still clung to the fields like a thin veil, Aamir noticed footprints beside his own. They were not fresh, but they were regular — the marks of someone who walked the same road every day. A few minutes later, he found their owner. An old man sat on a flat stone near the edge of the path, a wooden staff resting beside him, a small flock of sheep grazing quietly nearby. His beard was silver, his clothes simple, and his eyes clear in a way that surprised Aamir. Those eyes did not seem tired by age; they seemed polished by time. “Peace be upon you,” Aamir greeted. “And upon you, peace,” the old man replied warmly. “You walk early.” “So do you,” Aamir smiled. The old man nodded. “The morning is honest. It shows you who you are before the world begins to tell you who you should be.” The words struck Aamir gently, like a leaf touching water. From that day onward, they met often. Sometimes they spoke, sometimes they shared long silences. The old man never asked many questions, yet somehow Aamir found himself speaking — about his students, his ambitions, his fear of wasting his abilities, his constant comparison with others who seemed more confident, more successful, more certain. One morning, Aamir confessed, “I feel as if I am standing still while the world moves ahead.” The old man watched the sheep for a moment, then said, “Have you seen a tree grow?” “Yes.” “Does it run to become tall?” “No.” “Yet it becomes tall.” Aamir smiled faintly. “But people judge trees by their height.” “They do,” the old man agreed. “But trees are not planted to impress people. They are planted to become themselves.” The sentence stayed with Aamir long after the walk ended. Days turned into weeks, and weeks into months. With each walk, something inside him shifted — slowly, almost invisibly. He began to notice small beauties he had ignored before: the way dew rested on grass like tiny mirrors, the rhythm of his own breathing, the calm dignity of the mountains that never hurried yet never failed to stand firm. One morning, Aamir arrived to find the stone empty. No sheep. No staff. No silver-bearded teacher. 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Comments (1)
Great sharing man