The Benefits of Life Insurance in a Qualified Plan

Within a qualified retirement plan, such as a profit sharing plan, defined benefit or defined contribution plan (think 401(k)), there are a variety of options in terms of where you can “put” your money, but there is one well-kept secret that very few business owners take advantage of: the ability to offer life insurance inside of a qualified plan. Some types of plans are designed specifically to allow life insurance, while the ability to include life insurance in other plans, especially those already in place, will depend on the plan document. When it is allowed, using qualified plan dollars to purchase life insurance is a strategy that can satisfy a variety of needs for a variety of people.

As a business owner:

  • Contributions made into a qualified plan are tax deductible—enabling you to leverage business dollars to fund your life insurance needs.
  • By offering life insurance inside of your company’s qualified plan, you are able to provide a competitive benefit to help attract and retain highly qualified employees.
  • In a Profit Sharing Plan, life insurance can be used in business succession planning.
  • In a Defined Benefit Plan, including life insurance increases the plan contribution and therefore the tax deduction.
  • The cash value in a life insurance policy can potentially provide supplemental retirement income using policy loans and withdrawals.
  • Life insurance provides a tax-free death benefit in the event of premature death. The death benefit can help complete the retirement plan for the policy owner’s beneficiaries.

But it’s not just the business owner who is rewarded by having life insurance as a funding option within their qualified plan; the employees reap the benefits as well.

As an employee:

  • By purchasing life insurance pre-tax, you’re increasing your overall buying power, freeing up your personal after-tax dollars.
  • Employer contributions are not included in taxable income by the participant.
  • Fixed life insurance inside of a qualified plan is a great way to provide diversification in your financial portfolio since the cash value can be treated as a fixed or cash asset for purposes of asset allocation.
  • If there is sufficient accumulation, life insurance cash values can be accessed using policy loans and withdrawals to supplement retirement income.
  • Life insurance provides a tax-free death benefit in the event of a premature death, fully completing the plan.

Financial uncertainty is a hot topic of conversation these days and as a result, society is putting more pressure on business owners to help employees (as well as themselves) become financially prepared for retirement. Looking at the bottom line of life insurance in a qualified plan–business dollars are leveraged to fund benefits on a tax-favored basis, and that makes both dollars and sense!

Learn more about qualified plans.

The ability of a life insurance contract to accumulate sufficient cash value to help meet retirement goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. If remaining policy values and scheduled premiums are insufficient, additional out-of-pocket payments may be needed to keep the policy inforce. Surrender charges may reduce the policy’s cash value in early years.