3 Differences Between Life Insurance and Roth IRAs

Life insurance and Roth IRAs have a basic structure in common: they are both wealth transfer tools that help 

facilitate an efficient transfer of assets from one generation to the next and can provide a tax-free legacy. 

Despite their similarities, life insurance and Roth IRAs are very different, and the rules that apply to one don’t 

always apply to the other. In fact, this is the case more often than not. Below, we discuss the three main 

differences between these two retirement planning vehicles.

#1: Roth IRAs are always included in your estate. 

Thanks to the current $13.99 million federal exemption amount — the amount that can pass estate tax-free to beneficiaries — estate tax concerns are nowhere near what they used to be. The overwhelming majority of Americans will not 

owe any federal estate tax when they die. Still, there’s a small segment of the population that has 

to contend with such concerns. Plus, a number of states still impose state estate taxes, and many 

of those states have set their own exemption amounts much lower than that of the federal level. In 

such cases, life insurance may offer an advantage over Roth IRAs.

Here’s the deal in a nutshell. The “I” in IRA stands for individual. This means it’s always yours, 

and the value of your Roth IRA is always included in your estate. If you’re above the federal estate 

tax exemption amount or your applicable state estate tax exemption amount, your beneficiaries 

could end up owing estate tax — at the federal level, state level or both — on what you thought were 

“tax-free” Roth IRA assets.

In contrast, life insurance can be structured so that it’s outside of your estate. Not only does this 

produce an income tax-free benefit to your heirs but also one that is not subject to estate tax, 

regardless of the value of your estate when you die. In other words, it is a truly tax-free benefit. 

There are a variety of ways to accomplish this, including having an irrevocable trust purchase the 

life insurance policy. To figure out the option that is best for you, consult with your insurance advisor, 

tax professional or estate planning attorney — or better yet, all three!

#2: There’s a limit to the amount you can contribute to a Roth IRA. 

When it comes to the tax code, there is a giant hole for life insurance. Insurance carriers may limit the amount of insurance they’ll offer you based on a variety of factors, including your health, annual income and net worth. That 

has absolutely nothing to do with the tax code. As far as Uncle Sam is concerned, you can have as 

much insurance as you want, or perhaps, as much as you can get. In contrast, if you want to make 

annual Roth IRA contributions, you’re fairly restricted. For 2025, you cannot contribute more than 

$7,000 ($8,000 if age 50 or older by the end of the year) to a Roth IRA. You can, however, convert 

any existing IRA or eligible retirement plan funds to a Roth IRA.

Additionally, there’s no rule on what type of income you need to purchase life insurance or how 

much or how little you need to have. Roth IRA contributions, on the other hand, do have such 

restrictions. Roth IRA contributions can only be made with income that qualifies as “compensation,” 

which is typically earned income. In contrast, life insurance premiums can be paid with any 

type of income, including interest, dividends and Social Security, all of which are not considered 

compensation. If you had no income, you could simply pay for life insurance premiums from your 

existing assets (although in reality, if you have assets, you’re almost certainly going to have some 

income, even if it’s just interest).

There are issues on the other side of the spectrum too. If you have too much income, from whatever 

sources, you are prohibited from making any Roth IRA contributions. With life insurance, there’s no 

limit to the amount of income you can have. In fact, all things being equal, you can generally qualify 

for more life insurance with a higher income.

#3: There are no RMDs for life insurance.

When you leave a Roth IRA to non-spouse beneficiaries, 

such as children, they must generally receive the entire IRA account by December 31 of the tenth 

year after they inherit. These distributions are usually tax free, but they must be taken nonetheless. 

When beneficiaries inherit life insurance, there are no RMDs (required minimum distributions) to 

worry about. While not having to deal with RMDs is nice, it doesn’t necessarily make life insurance a 

better option for your planning than a Roth IRA.

Consider the following: when a beneficiary inherits life insurance, the only amount they’ll receive tax 

free is the actual life insurance proceeds. If they don’t need the money right away, they might invest 

the proceeds, but whatever interest, dividends, capital gains or other income those investments 

generate will be taxable (unless they are invested in assets that don’t produce taxable income, such 

as municipal bonds). In contrast, the inherited Roth IRA generally does not have to be taken out 

until December 31 of the tenth year following the owner’s death. 

For example, take someone who inherited a Roth IRA at age 50. The Roth IRA can be left alone to 

grow for 10 years. That growth can later be distributed tax free as well. A beneficiary of a $500,000 

life insurance policy will only receive $500,000 income tax free, while a beneficiary inheriting a 

$500,000 Roth IRA may receive twice that amount in tax-free distributions after 10 years.

A Final Thought

If you’re looking to leave a legacy to your heirs when you die, there are many tools to consider. Life 

insurance and Roth IRAs are two of the many options available. In some cases, life insurance may 

not be available due to poor health. In other cases, such as when your beneficiaries will be in a 

lower bracket than you are now, there may be a greater net benefit by leaving them larger amounts 

of tax-deferred accounts, like IRAs, instead of a smaller amount like Roth IRAs. The bottom line is 

that every situation is different and there’s no one-size-fits-all solution. Do your homework, seek 

competent advice and make a decision that best fits your individual situation and goals.