Yahoo Finance TikTok Says Life Insurance Is a Better Bet Than 401(k) Plans — Here’s Why an Economist Says This Is Bad Advice
Personal finance creators on TikTok have been singing the praises of life insurance plans as a better alternative to the 401(k). Common complaints across FinTok include the high management fees that sometimes come with 401(k) plans, age restrictions on making withdrawals and the taxes you are forced to pay when you do make withdrawals. Creators are pushing life insurance as the superior option, noting that these plans are not reliant on stock market performance.
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But is a life insurance policy really a better option than a 401(k)? Here’s why Robert Frick, corporate economist with Navy Federal Credit Union, disputes this common TikTok advice.
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Life Insurance Is Not a Substitute for a 401(k) Because They Have Different Functions
Frick said that “comparing 401(k) and life insurance policies is an apples-to-oranges comparison.”
“A 401(k) is designed to give employees the proper exposure to the markets over time at a low cost, with tax advantages,” he said. “Yes, 401(k) values swing while life insurance policies generally offer guaranteed returns, but there’s a huge return for that risk — and that risk disappears over time. By taking market risk, 401(k) participants get much higher returns — and the risk is reduced when investing over years.”
To demonstrate his point, Frick gives the example of what would happen to $20,000 invested in a 401(k) versus in a life insurance policy.
“Take $20,000 invested at market rates — 8% [in a 401(k)] versus the 3% an insurance policy might offer. Over 30 years, the 401(k) is worth about $200,000 with very low risk, and the insurance policy is worth $48,000,” he said.
401(k) Plans Are Simple To Use
Life insurance policies can get complex, but a 401(k) plan is “easy,” Frick said.
“Most plans default you into a low-cost, highly diversified, professionally managed portfolio — generally a target-date fund — and give you free money in the form of matching,” he said. “They may also automatically escalate your contribution. All these auto features can be overwritten if desired.”
Historically, 401(k) plans have been a simple, effective way to save for retirement.
“401(k) and 401(k) rollovers into IRA plans have accumulated more than $20 trillion in retirement savings, and have been the biggest boon to retirement savers in history,” Frick said. “The odds the average person can design and manage a balanced portfolio at low cost is small, especially given professional investors struggle to do so.”
While 401(k) plans are easy to use, life insurance policies are the opposite — and usually end up costing more than your typical 401(k).
“Life insurance policies are very complex and charge high fees — generally much higher than the average 1% annual fee paid in 401(k) plans,” Frick said. “And you’ll generally be paying a commission to buy a life insurance policy, so you have the additional burden of figuring out if the person selling you a policy has your interests at heart or is after the highest commission.”
It Is Not Easier To Cash Out a Life Insurance Policy
One of the main complaints about 401(k) plans on TikTok is that it is difficult to take money out of it, noting that you must pay a penalty if you withdraw too early. However, Frick said that it is not any easier to take money out of a life insurance policy.
“Both life insurance policies and 401(k) plans have barriers to exit, but a life insurance policy is usually much harder to cash in — and with higher penalties — than accessing money from a 401(k) plan,” he said.
The Bottom Line
It’s always important to take any financial advice on TikTok with a grain of salt. Any creator that’s pushing a life insurance policy is likely getting a commission for doing so, so it’s especially important to be wary of this particular advice.
“Don’t let bad advice from TikTok influencers separate you from the best retirement savings vehicle ever invented,” Frick said, “especially when it’s to their advantage.”
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This article originally appeared on GOBankingRates.com: TikTok Says Life Insurance Is a Better Bet Than 401(k) Plans — Here’s Why an Economist Says This Is Bad Advice
