Purchasing Life Insurance Out of a 401k

What this episode covers

Purchasing life insurance out of a 401k is an option of which most people are unaware. Here’s a quick rundown of what’s what, the rules, and limitations. Download Audio Transcript: I spoke before about whether a 401K plan should’s, shouldn’t’s, what has to happen for a 401K plan to purchase life insurance contracts. What I want to visit about right now though is what funds can be used from a 401K plan if the decision is made for the 401K plan to purchase a life insurance contract. Again, I’m going to say at the very beginning, you should always review these types of decisions with your tax professional because the numbers need to be crunched to determine the pros and the cons of this kind of a situation are. If the 401K plan purchases life insurance contracts, what funds can be used and is there a limitation. Funds with any 401K plan can be used but with the following restrictions. The good news is that if you establish a self directed 401K plan and you rolled over funds from another IRA or an old 401K into the plan, those are considered rollover funds. 100% of those funds can be used towards life insurance contracts. Realistically even if the plan decided to purchase life insurance contracts, would it use the whole 100% of those rollover funds for that, probably not. The power of the point I’m trying to make is that 100% of those funds can be used if elected to. Are there other limitations of funds within the plan. What about contributory funds, contributions that you make as the employee of that business, that you wish to be used towards life insurance contracts from the plan. There’s very specific rules, let’s go through them. If the plan is purchasing from contributory funds, life insurance, 49.99% of contributory funds can be used to purchase whole life insurance products. If contributory funds are being used for non whole life products, such as term, IULs, EIUL policies et cetera. 25% of contributory funds can be used towards the purchase of the life insurance premiums. We have some powerful tools to work with your 401K plan and the self directed. You can invest in traditional assets, you can invest in non-traditional assets, you can even invest in life insurance. As a reminder if the plan is purchasing life insurance contracts, the plan documents have to be written or amended to permit that. The bottom line is the plan has the ability to do that and it’s a powerful tool in addition to your traditional and non-traditional assets.

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