#2 – There’s a limit to the amount you can contribute to a Roth IRA
While insurance carriers may limit the amount of insurance they’ll offer based on various factors, including your health condition, your annual income and net worth, etc. there is no tax code restricts how much life insurance you can purchase.
Unfortunately, if they want to make annual Roth IRA contributions, tax code restrictions apply, details see here.
Furthermore, 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.
For that matter, if someone who has no income, he or she could simply pay for life insurance premiums from existing assets.
When many clients really begin to focus on legacy planning, they’re already retired, or close to it. Therefore, their ability to make Roth IRA contributions is usually limited. There are no similar issues with life insurance.
In our next blog post, we will discuss the third difference between Roth IRA and Life Insurance – RMDs.