SoFi

No matter your age, it’s probably a good time to think about getting life insurance. It’s a key step in financial planning, so let’s get to know the two main types – term and permanent – so you can understand which is the right option to protect your loved ones.

First, a crash course in what insurance is: When you purchase a life insurance policy, you make recurring premium payments. Should you die while covered, your policy will pay a lump sum that you’ve selected to the beneficiaries you have designated. It’s an important way to know that if you weren’t around, working hard, your loved ones’ expenses (housing, food, medical care, tuition, etc.) would be covered.

Granted, no one wants to imagine leaving this earth, but buying life insurance can give you tremendous peace of mind.

Types of Life Insurance

Now that the basic concept is clear, let’s take a closer look at the two types of life insurance policies: term and permanent.

Term life insurance offers coverage for a certain amount of time, while permanent life insurance provides coverage for the policyholder’s whole life as long as premiums are paid. (These policies come in a variety of options. We’ll break those down for you in a moment.) There’s no right or wrong type; only a policy that is right for you and your needs. Figuring out which one will be easier once you understand the eight different kinds of life insurance and the needs they were designed to satisfy.

1. Term Life Insurance

Term life insurance, as the name suggests, protects a policyholder for a set amount of time. It pays a death benefit to beneficiaries if the insured person dies within that time frame. Term life insurance coverage usually ranges from 5 to 30 years. Typically, all payments and death benefits are fixed.

There are several reasons why a term life insurance policy might be right for you. Perhaps there is a specific, finite expense that you need to know is covered. For instance, if covering the years of a mortgage or college expenses for loved ones is a priority, term life insurance may make the most sense.

These policies can be helpful for young people too. If, say, you took out hefty student loans that are coming due and your parents co-signed, you might want to buy a life insurance policy. The lump sum could cover that debt in a worst-case scenario.

Another reason to consider term life insurance: It tends to be more affordable. If you don’t need lifelong coverage, a term policy might be an excellent choice that’s usually easier on your budget.

A few variables to be aware of:

•   Term life insurance may be renewable, meaning its term can be extended. This is true “even if the health of the insured (or other factors) would cause him or her to be rejected if he or she applied for a new life insurance policy,” according to the Insurance Information Institute. Renewal of a term policy will probably trigger a premium increase, so it’s important to do the math if you’re buying term insurance while thinking, “I’ll just extend it when it ends.”

•   If you would be comfortable with your coverage declining over time (that is, the lump sum lowering), consider looking into the option known as decreasing term insurance.

💡 Quick Tip: Term life insurance coverage can range from $100K to $8 million. As your life changes, you can increase or decrease your coverage.

2. Whole Life Insurance

Whole life insurance is the most common type of permanent life insurance, which protects policyholders for the duration of their lives.

As long as the premiums are paid, whole life insurance offers a guaranteed death benefit whenever the policyholder passes. In addition to this extended covered versus term life insurance, whole life policies have a cash value component that can grow over the policy’s life.

Here’s how this works: As a policyholder pays the premiums (these are typically fixed), a portion goes toward the cash value, which accumulates over time. We know the terminology used in explaining insurance can get a little complicated at times, so note there’s another way this may be described. You may hear this referred to as your insurance company paying dividends into your cash value account.

This cash value accrues on a tax-deferred basis, meaning you, the policyholder, won’t owe taxes on the earnings as long as the policy stays active. Also worth noting: If you buy this kind of life insurance and need cash, you can take out a loan (with interest being charged) against the policy or withdraw funds. If a loan is unpaid at the time of death, it will lower the death benefit for beneficiaries.

The cash value component and lifelong coverage of this type of life insurance can be pretty darn appealing. And it may be a good fit for funding a trust or supporting a loved one with a disability. However, buying a whole life policy can be pricey; it can be many multiples of the cost of term insurance. It’s definitely a balancing act to determine the coverage you’d like and the price you can pay.

For those who are not hurting in the area of finances, whole life can have another use. A policy can also be used to pay estate taxes for the wealthy. For individuals who have estates that exceed the current estate tax exemption (IRS guideline for 2024) of 13.6 million, the policy can pay the estate taxes when the policyholder dies.

3. Universal Life Insurance

Who doesn’t love having freedom of choice? If you like the kind of protection that a permanent policy offers, there are still more varieties to consider. Let’s zoom in on universal life insurance, which may provide more flexibility than a whole life policy. The cash account that’s connected to your policy typically earns interest, similar to that of a money market. While that may not be a huge plus at this moment, you will probably have your life insurance for a long time, and that interest could really kick in.

What’s more, as the cash value ratchets up, you may be able to alter your premiums. You can put some of the moolah in your cash account towards your monthly payments, which in some situations can really come in handy.

This kind of policy is also sometimes called adjustable life insurance, because you can decide to raise the benefit (the lump sum that goes to your beneficiaries) down the road, provided you pass a medical exam.

4. Variable Life Insurance

Do you have an interest in finance and watch the market pretty closely? We hear you. Variable life insurance could be the right kind of permanent policy for you. In this case, the cash value account can be invested in stocks, bonds, and money market funds. That gives you a good, broad selection and plenty of opportunity to grow your funds more quickly. However, you are going to have more risk this way; if you put your money in a stock that fizzles, you’re going to feel it, and not in a good way. Some policies may guarantee a minimum death benefit, even if the investments are not performing well.

This volatility can play out in other ways. If your investments are performing really well, you can direct some of the proceeds to pay the premiums. But if they are slumping, you might have to increase your premium payment amounts to ensure that the policy’s cash value portion doesn’t fall below the minimum.**

This kind of variable life insurance policy really suits a person who wants a broader range of investment options for the policy’s cash value component. While returns are not guaranteed, the greater range of investments may yield better long-term returns than a whole life insurance policy will.

5. Variable Universal Life Insurance

Variable universal life insurance is another type of a permanent policy, but it’s as flexible as an acrobat. If you like to tinker and tweak things, this may be ideal. Just as the name suggests, it merges some of the most desirable features of variable and universal plans. How precisely does that shake out for you, the potential policyholder? For the cash account aspect of your policy, you have all the rewards (and possible risks) of a variable life insurance policy that you just learned about above. You have a wide array of ways to grow your money, which puts you in control.

The features that are borrowed from the universal life model are the ability to potentially change the death benefit amount. You can also adjust the premium payments. If your cash account is soaring, you can use that money towards your monthly costs…sweet! It’s a nice bonus, especially if funds are tight.

6. Indexed Universal Life Insurance

This is another type of permanent life insurance with a death benefit for your beneficiaries as well as a cash account. You may see it called “IUL.”

In this instance, the cash account earns interest based on how a stock-market index performs. For instance, the money that accrues might be linked to the S&P (Standard & Poor’s) 500 composite price index, which follows the shifts of the 500 biggest companies in America. These policies may offer a minimum guaranteed rate of return, which can be reassuring.

On the other hand, there may be a cap on how high the returns can go. A IUL insurance plan may be a good fit if you are comfortable with more risk than a fixed universal life policy, but don’t want the risk of a variable universal life insurance product.

7. Guaranteed or Simplified Issue Life Insurance

With most life insurance policies, some form of medical underwriting is required. “Underwriting” can be one of those mysterious insurance terms that is often used without explanation. Here’s one aspect of this that you should know about.

Part of the approval process for underwritten policies involves using information from exams, blood tests, and medical history to determine the applicant’s health status, which in turn contributes to the calculated monthly costs of a policy. Underwriting serves an important purpose: It helps policyholders pay premiums that coincide with their health status. If you work hard at staying in excellent health, you are likely to be rewarded for that with lower monthly payments.

However, sometimes insurance buyers don’t want to go through that process. Maybe they have health issues. Or perhaps they don’t want to wait the 45 or 60 days that underwriting often requires before a policy can be issued. With guaranteed or simplified issue life insurance, the steps are streamlined. Applicants may not have to take a medical exam to qualify and approvals come faster.

These policies tend to have lower death benefits (think $10,000, $50,000, or perhaps $250,000 at the very high end) than the other types of life insurance we’ve described. Less medical underwriting also means policies tend to be more expensive. Who might be interested in this kind of insurance? It may be a good option for someone who is older (say, 45-plus), has an underlying medical condition that would usually mean higher insurance rates, or has been rejected for another form of insurance. The coverage may suit the needs of someone looking for insurance really quickly, like the uninsured people who, during the COVID-19 pandemic, wanted to sign up ASAP.

One point to be aware of: Many of these policies have what’s called a graded benefit or a waiting period. This usually means that the beneficiaries only receive the full value of the policy if the insured has had it for over two years. If the policyholder were to die before that time, the payout would be less — perhaps just the value of the premiums that had been paid.

Of the two kinds we’ve mentioned, guaranteed is usually the easiest to qualify for (as the name suggests) but costs somewhat more than the simplified issue variety, which tends to have a few more constraints. You might be deemed past the age they insure or a medical condition might disqualify you.

Worth noting: You may hear these life insurance policies are known as final expense life insurance or burial insurance. As with any simplified issue or guaranteed issue life insurance policies, no medical exam is required. These plans typically have a small death benefit (up to $50,000 in many cases) that is designed to cover funeral costs, medical bills, and perhaps credit card debt at the end of life.

8. Group Life Insurance

Group life insurance is often not something you go out and buy. Typically, it’s a policy that’s offered to you as a benefit by an employer, a trade union, or other organization. If it’s not free, it is usually offered at a low cost (deducted from your payroll), and a higher amount may be available at an affordable rate. Since an employer or entity is buying the coverage for many people at once, there are savings that are passed along to you.

That said, the amount of coverage is likely to be low, perhaps between $20,000 and $50,000, or one or two times your annual salary. Medical exams are usually not required, and the group life insurance will probably be a term rather than permanent policy,

A couple of additional points to note:

•   There may be a waiting period before you are eligible for the insurance. For instance, your employer might stipulate that you have to be a member of the team for a number of months before you can access this benefit.

•   If you leave your job or the group providing coverage, your policy is likely to expire. You may have the option to convert it to an individual plan at a higher premium, if you desire.

Deciding Which Life Insurance Is Best for You

So many factors go into creating that “Eureka!” moment in which you land on the right life insurance policy for you. Your age, health, budget, and particular needs play into that decision.

If you need life insurance only for a certain amount of time, you may want to select a term life insurance policy that dovetails with your needs. Covering a child’s college and postgraduate years is a common scenario. Another is taking out a policy that lasts until your mortgage is paid off, to know your partner would be protected.

A term life insurance policy may also be a good fit for someone who has a limited budget but needs a substantial amount of coverage. Since term policies have a specific coverage window, they are often the more affordable option.

For someone who needs coverage for life and wants a cash accumulation feature, a permanent policy such as whole life insurance might be worth considering. Not only will this policy stay in place for life (as long as the premiums are paid), but the cash value element allows use of the funds to pay premiums or any other purpose.

Permanent life insurance lets you know that, whenever you pass on, funds will be there for your dependents. It can be a great option if you have, say, a loved one who can’t live independently, and you want to know they will have financial coverage. Whole life insurance is typically more expensive than term life insurance, but the premium remains the same for the insured’s life.

In terms of when to buy life insurance, here are a few points to keep in mind:

•   It’s best to apply when you’re young and healthy so you can receive the best rate available.

•   Typically, major life events signal people to buy life insurance. These are moments when you realize someone else is depending on you (and, not to sound crass, your income). It could be when you marry or have a child. It could be when you realize a relative will need long-term caregiving.

•   Even if you are older or have underlying health conditions, there are options available to you. They may not give as high an amount of coverage as other life insurance policies, but they can offer a moderate benefit amount and give you a degree of peace of mind.

💡 Quick Tip: With life insurance, one size does not fit all. Policies can and should be tailored to fit your specific needs.

The Takeaway

Picking out the right life insurance policy can seem complicated, but in truth, the number of choices just reflects how easy it can be to get the right coverage for your needs. There’s truly something for everyone, regardless of your age or budget. Whether you opt for term, permanent, group, or guaranteed issue, you can get the peace of mind and protection that all insurance plans bring.

SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. Apply in just minutes and get an instant decision. As your circumstances change, you can update or cancel your policy with no fees and no hassles.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPT0124008

Many retirees continue working or take on a new job, but working after retirement can have downsides.

A non-deductible IRA is an IRA, or IRA contributions, that cannot be deducted from your income. While contributions to a traditional IRA are tax-deductible, non-deductible IRA contributions offer no immediate tax break.

In both cases, though, contributions grow tax free over time — and in the case of a non-deductible IRA, you wouldn’t owe taxes on the withdrawals in retirement.

Why would you open a non-deductible IRA? If you meet certain criteria, such as your income is too high to allow you to contribute to a traditional IRA or Roth IRA, a non-deductible IRA might help you increase your retirement savings.

It helps to understand how non-deductible contributions work, what the rules and restrictions are, as well as the potential advantages and drawbacks.

Who Is Eligible for a Non-Deductible IRA?

Several factors determine whether an individual is ineligible for a traditional IRA, and therefore if their contributions could fund a non-deductible IRA. These include an individual’s income level, tax-filing status, and access to employer-sponsored retirement plans (even if the individual or their spouse don’t participate in such a plan).

If you and your spouse do not have an employer plan like a 401(k) at work, there are no restrictions on fully funding a regular, aka deductible, IRA. You can contribute up to $7,000 in 2024; $8,000 if you’re 50 and older. In 2023, you can contribute up to $6,500; $7,500 if you’re 50 or older. And those contributions are tax deductible.

However, if you’re eligible to participate in an employer-sponsored plan, or if your spouse is, then the amount you can contribute to a deductible IRA phases out — in other words, the amount you can deduct gets smaller — based on your income:

•   For single filers/head of household: the 2024 contribution amount is reduced if you earn more than $77,000 and less than $87,000. Above $87,000 you can only contribute to a non-deductible IRA. (For 2023, the phaseout begins when you earn more than $73,000 and less than $83,000. If you earn more than $83,000, you can’t contribute to a traditional IRA.)

•   For married, filing jointly:

◦   If you have access to a workplace plan, the phaseout for 2024 is when you earn more than $123,00 and less than $143,000. (For 2023, the phaseout is when you earn more than $116,000, but less than $136,000.)

◦   If your spouse has access to a workplace plan, the 2024 phaseout is when you earn more than $230,000 and less than $240,000. (For 2023, the phaseout is when you earn more than $218,000 but less than $228,000.)

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Non-Deductible IRA Withdrawal Rules

The other big difference between an ordinary, deductible IRA and a non-deductible IRA is how withdrawals are taxed after age 59 ½. (IRA withdrawals prior to that may be subject to an early withdrawal penalty.)

•   Regular (deductible) IRA: Contributions are made pre-tax. Withdrawals after 59 ½ are taxed at the individual’s ordinary income rate.

•   Non-deductible IRA: Contributions are after tax (meaning you’ve already paid tax on the money). Withdrawals are therefore not taxed, because the IRS can’t tax you twice.

To make sure of this, you must report non-deductible IRA contributions on your tax return, and you use Form 8606 to do so. Form 8606 officially documents that some or all of the money in your IRA has already been taxed and is therefore non-deductible. Later on, when you take distributions, a portion of those withdrawals will not be subject to income tax.

If you have one single non-deductible IRA, then the process is similar to a Roth IRA. You deposit money you’ve paid taxes on, and your withdrawals are tax free.

It gets more complicated when you mix both types of contributions — deductible and non-deductible — in a single IRA account.

Here’s an example of different IRA withdrawal rules:

Let’s say you qualified to make deductible IRA contributions for 10 years, and now you have $50,000 in a regular IRA account. Then, your situation changed — perhaps your income increased — and now only 50% of the money you deposit is deductible; the other half is non-deductible.

You contribute another $50,000 in the next 10 years, but only $25,000 is deductible; $25,000 is non-deductible. You diligently record the different types of contributions using Form 8606, so the IRS knows what’s what.

When you’re ready to retire, the total balance in the IRA is $100,000, but only $25,000 of that was non-deductible (meaning, you already paid tax on it). So when you withdraw money in retirement, you’ll owe taxes on three-quarters of that money, but you won’t owe taxes on one quarter.

Contribution Limits and RMDs

There are limits on the amount that you can contribute to an IRA each year, and deductible and non-deductible IRA account contributions have the same contribution caps. People under 50 years old can contribute up to $7,000 for 2024, and those over 50 can contribute $8,000 per year. People under 50 years old can contribute up to $6,500 for 2023, and those over 50 can contribute $7,500 per year.

IRA account owners are required to start taking required minimum distributions (RMDs), similar to a 401(k), from their account once they turn 73 years old. Prior to that, account holders can take money out of their account between ages 59 ½ and 73 without any early withdrawal penalty.

Individuals can continue to contribute to their IRA at any age as long as they still meet the requirements.

Benefits and Risks of Non-Deductible IRA

While there are benefits to putting money into a non-deductible IRA, there are some risks that individuals should be aware of as well.

Benefits

There are several reasons you might choose to open a non-deductible IRA. In some cases, you can’t make tax-deductible contributions to a traditional IRA, so you need another retirement savings account option. Though your contributions aren’t deductible in the tax year you make them, funds in the IRA that earn dividends or capital gains are not taxed, because the government doesn’t tax retirement savings twice.

Another reason people use non-deductible IRAs is as a stepping stone to a Roth IRA. Roth IRAs also have income limits, but they come with additional choices. High income earners can start by contributing funds to a non-deductible IRA, then convert that IRA into a Roth IRA. This is called a backdoor Roth IRA.

One thing to keep in mind with a backdoor Roth is that the conversion may not be entirely tax free. If an IRA account is made up of a combination of deductible and non-deductible contributions, when it gets converted into a Roth account some of those funds would be taxable.

Risks

The primary benefits of non-deductible IRAs come when used to later convert into a Roth IRA. It can be risky to keep a non-deductible IRA ongoing, especially if it’s made up of both deductible and non-deductible contributions, which can be tricky to keep track of for tax purposes. You can keep a blended IRA, it just takes more work to keep track of the amounts that are taxable.

As noted above, it requires dividing non-deductible contributions by the total contributions made to all IRAs one has in order to figure out the amount of after-tax contributions that have been made.

Non-Deductible IRA vs Roth IRA

With a non-deductible IRA, you contribute funds after you’ve paid taxes on that money, and therefore you’re not able to deduct the contributions from your income tax. The contributions that you make to the non-deductible IRA earn non-taxable interest while they are in the account. The money isn’t taxed when it is withdrawn later.

Roth IRA contributions are similarly made with after-tax money and one can’t get a tax deduction on them. Also, a Roth IRA allows an individual to take out tax-free distributions during retirement.

Unlike other types of retirement accounts, a Roth IRA doesn’t require the account holder to take out a minimum distribution amount.

There are income limits on Roth IRAs, so some high-income earners may not be able to open this type of account. The non-deductible IRA is one way to get around this rule, because an individual can start out with a non-deductible IRA and convert it into a Roth IRA.

How Can I Tell If a Non-Deductible IRA Is the Right Choice?

Non-deductible IRAs can be a way for high-income savers to make their way into a backdoor Roth account. This strategy can help them reduce the amount of taxes they owe on their savings. However, they may not be the best type of account for long-term savings or lower-income savers.

The Takeaway

For many people, contributing to an ordinary IRA is a clearcut proposition: You deposit pre-tax money, and the amount can be deducted from your income for that year. Things get more complicated, however, for higher earners who also have access (or their spouse has access) to an employer-sponsored plan like a 401(k) or 403(b). In that case, you may no longer qualify to deduct all your IRA contributions; some or all of that money may become non-deductible. That means you deposit funds post tax and you can’t deduct it from your income tax that year.

In either case, though, all the money in the IRA would grow tax free. And the upside, of course, is that with a non-deductible IRA the withdrawals are also tax free. With a regular IRA, because you haven’t paid taxes on your contributions, you owe tax when you withdraw money in retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Photo credit: iStock/Drazen Zigic

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

SOIN0124129