Using Life Insurance for Retirement Funding: A Guide for Business Owners

After years of hard work and dedication to building your business, it’s only natural to start thinking about retirement and the opportunities it brings. But what happens when your retirement savings fall short? Not having enough money in retirement is a risk many small business owners face. Traditional retirement plans, while useful, often fall short of providing the retirement security you need—especially if your income has grown significantly over time.

The challenge is that common retirement tools, such as 401(k)s and Social Security, work well when income is modest. As income rises, however, the benefits of these tools become more limited, creating a gap between the amount of money you’ll need in retirement and the amount you’ll have. Including life insurance within a qualified retirement plan may help.

How can life insurance help fund my retirement as a business owner?

By including life insurance within a qualified retirement plan, you can help save more money for retirement. It begins with your business making tax-deductible contributions to a qualified retirement plan, such as a 412(e)(3) plan. These contributions can be used to buy both life insurance and fixed annuities, which grow tax-deferred until retirement. The life insurance adds a layer of protection to the plan if you were to die prematurely.

How does this retirement strategy work?

Tax deductible contributions: Your business contributes to the retirement plan, and a portion of these contributions is used to buy a life insurance policy. The contributions are generally tax-deductible, reducing your taxable income today while funding your future retirement. There are no personal out-of-pocket expenses.

Tax-deferred growth: The life insurance policy within the plan grows tax deferred. This means the cash value in the life insurance policy accumulates without being taxed.

Flexibility in retirement: One of the advantages of this strategy is the flexibility it offers when you retire. When you reach retirement age, you have several options for handling the life insurance policy within the plan. You can:

• Surrender the policy and roll the proceeds into an IRA: An IRA is an individual retirement account. This option provides you with added retirement funds from the cash value of your life insurance policy, giving you added flexibility to cover expenses.
• Distribute the policy: You can become the owner of the policy, allowing you to keep the coverage intact, subject to tax at the policy’s fair market value. This is especially valuable if you’re no longer insurable at retirement, ensuring you maintain financial protection for your family.

Financial protection: If you pass away before retirement, the life insurance in your plan guarantees¹  that the retirement benefits you’ve worked toward are there for your family, even if you’re not there to enjoy them.

Learn more about life insurance offerings from Ameritas.

Help save more for retirement

This strategy is designed to help business owners ensure their retirement plan doesn’t fall short. By incorporating life insurance into a qualified retirement plan, you can achieve the tax advantages of a qualified plan while also gaining the financial protection of life insurance.

In the right situation, life insurance within a qualified plan can help you close the gap between what you’ll need in retirement and what traditional retirement tools can provide. And even if you plan to never retire, it’s empowering to have the financial freedom to decide.

This information is for informational purposes only. It is not intended as tax or other legal advice. For application of this information to your specific situation, you should consult an attorney.

¹ Guarantees are based on the claims-paying ability of the issuing company.