How To Buy Life Insurance in a 401(k)
Use pre-tax dollars and 401(k) dividends to pay premiums
Qualified pension plans such as 401(k)s might not be the first place you think of as a place to hold life insurance, but maybe it’s an option worth considering by small business owners.
Including life insurance as one of the investment choices within a 401(k) offers some very interesting advantages: Premiums are paid with tax-deferred dollars and can even be funded by income generated by 401k plan assets. For instance, a bond fund produces income that could be used to pay the life insurance premiums within the plan. (The IRS, however, regards the premium as taxable income).
Who might be a good fit for the life insurance option in a 401(k) plan? “A participant who is older and wealthy and anticipates the need for permanent insurance,” says Jason Roll of Wealth Management Partners in Denver. The permanent insurance would be a way to cover anticipated estate tax liability, he notes. “The insurance policy may provide valuable death benefits and upon retirement the participant will be able to buy, or take by distribution, the policy to get the needed permanent life insurance. This can also mean that much of the up-front cost associated with purchasing a permanent life policy can be handled with tax-deferred dollars.”
