Making Life Insurance Deductible….
Business Owners are often reluctant to use corporate dollars for non-deductible expenses and life insurance is generally a non-deductible expense.
Since a business owner can’t directly deduct life insurance premiums, the next best thing may be to use dollars that are tax-deductible for another reason, such as qualified plan contributions, to purchase life insurance. Many business owners are surprised to learn that many qualified plans allow for all or part of the qualified funds, as well as part of the annual plan contributions, to be used for the purchase of life insurance.
Life Insurance as a Permissible Investment
Qualified plans can be broken down into three categories: profit sharing plans, pension plans, and those plans that use an individual retirement account (IRA) as the funding vehicle, such as Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs). Under the pension category are defined benefit pension plans, cash balance pension plans, money purchase pension plans, and target benefit pension plans. Under the profit sharing plan category are 401(k) plans, stock bonus plans, and employee stock ownership plans (ESOPs). All plan falling within the profit sharing or pension categories may purchase incidental life insurance so long as the plan allows.
It is very important to understand that regardless of whether a qualified plan can legally purchase life insurance, the plan document must specifically allow for life insurance before any life insurance can be purchased. If the plan document does not currently allow for the purchase of life insurance it may be possible to amend the existing plan or to roll the existing plan into a new plan that does allow for the purchase of life insurance. If an employer is considering establishing a new plan that will purchase insurance, the employer may want to consider a “self directed plan” whereby the employer can establish the permissible investments.
For more details or questions on the technical and practical aspects of owning life insurance in a qualified plan, please contact your Brokerage Manager.