What is a better use of my money - a Roth IRA or life insurance?

If we looked at the question of Roth IRA vs. Life Insurance from a purely statistical standpoint, the low probability of dying prematurely would indicate you’re better off investing in the stock market.   Since inception, the average annual return of the S&P 500 is approximately 10%.  However, the real question we need to answer here has two parts.   

1. How do I take care of my future needs?  
2. How do I take care of my family that is currently dependent on me?

In terms of your personal retirement needs, we suggest 4 general steps that will lead you towards financial success.  If you are a follower of Sommers Financial, you have likely heard us say these before.  In order of priority they are:

1. Meet the match through your employer retirement plan
2. Eliminate debt with an interest rate higher than 6%
3. Contribute the max to an HSA
4. Contribute the max to a Roth IRA

At the same time though, while you are focusing on your future, you also need to consider the future of your family if something should happen to your income that they depend on. To protect your family against your loss of life/future income, we suggest term life insurance. When budgeting, term life insurance would fit into the “Needs” category, while your Roth IRA fits into the “Savings” category. 

A term life insurance policy pays a guaranteed death benefit to your heirs during a limited coverage period – like 10, 20 or 30 years. This time-defined insurance is one of the least costly insurances to buy. For about the cost of a latte a week, a healthy 35-year old non-smoker can typically obtain a 20-year policy with a $250,000 payout upon death. Not only are they inexpensive, but term life insurance policies are also efficient since most people don’t need coverage throughout their entire life.    

There are several other types of life insurance that are a mixture of insurance and investments and considered permanent in nature. One of these is whole-life insurance. In the above example, the policy costs are more in the vicinity of $200-$300 per month (10x the cost of term insurance). Some policies have riders that refund your money at the end of the term. Sounds good, right?  But, you should ask yourself how they can afford to do this. If they are charging you for a rider, is the cost of that rider worth the return they are going to give you for locking up your money? Insurance companies use mortality tables to determine the odds of paying out a death claim. They must remain profitable to stay in business. They’ve done the math.  

By sticking with a term life insurance policy, you can take your cost savings and invest your hard-earned money elsewhere. Invest in those earlier strategies we suggested which allow you to be the one in control over your investments and your risk. This will leave you with more flexibility, a better diversified portfolio and higher returns. 

Resist looking at insurance as a way to get wealthy, or you may very likely become cash poor – or worse yet, leave your dependents without proper coverage. Save, invest, and have adequate insurance coverage; but keep them separate.