Taxation

With a 401K, the money you’re investing into this account will be pulled directly from your paycheck and placed into your 401K - so your money will be taxed later, when you take out the money for retirement.  With an IUL, the money has already been taxed, so when you pull it out later, it will be paid to you TAX FREE.

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Why is this difference important if the money will be taxed either way? INFLATION.  With inflation the tax rate on our income is guaranteed to be higher in the future, when you’re ready to retire. So, in the long run you will be saving tens, if not hundreds, of thousands on taxes by using taxed money now versus later.

Penalties

One of the biggest negatives about 401Ks , is that you can’t use your money when you want it. You must wait until you’re 59 ½ years old to access your money without a penalty cost. The IRS will charge you 10% PLUS income tax on any money that you withdrawal early and the 401k company itself may also charge you a percentage. You are looking at anywhere from 10-40% taken out from your retirement, just to use your own money.

With an IUL, there is no penalty for taking your money out.  Most IUL companies with charge a “loan rate”, which is anywhere from 1-6%. This loan rate is charged, so that they money you’re taking out will continue growing interest. 

Investment Floor

I think the most important difference between IULs and 401Ks is the floor in which your money is invested. If you have been investing in a 401K for a few years, and track your gains/losses, I am sure there have been a few years where you lost a good amount of money. This is because your 401K has no floor in which the company caps your losses.

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With an IUL, it operates on a ZERO floor. Which means your investment can never go below 0%. What does this mean? Your IUL can only GAIN interest, you cannot lose interest on your money.

Your money is protected against market loss.