How can the Solo 401k invest in life insurance?
Updated over a week ago

While it is possible to purchase life insurance with Solo 401k funds, there are strict limitations and it generally doesn’t make sense as a good investment for most investors

What are the limits on purchasing life insurance with my Solo401k?

  • No more than 49% of your Solo 401k contributions can be used to buy whole life insurance

  • No more than 25% can buy term or universal life insurance

One of the primary benefits of life insurance products is tax advantages that are lost when buying with 401k funds.

Why would I purchase life insurance with my Solo 401k?

You may choose to purchase life insurance with your Solo 401k for one of the following reasons:

  • You don't have the funds to purchase life insurance outside your retirement account

  • You don't qualify for life insurance outside of the retirement account for health reasons

  • You want life insurance for your beneficiaries to be in a more protected structure

What are the disadvantages of purchasing life insurance with my Solo 401k?

If you use 401k funds to buy life insurance, you lose the tax-free advantage for the contributions to fund the plan. However, you will not pay taxes on the life insurance premiums. Essentially, you will not be taxed twice for the purchase, but you will lose the tax-deferred advantage that the Solo 401k provides. 

For example: Say you purchase a policy in 2019 and the premiums for 2019 total up to $800. The $800 of contributions that you use for the life insurance premiums in 2019 are not tax-deferred. You will have to pay taxes on the $800. However, you will not have to pay taxes on the $800 that you pay towards the life insurance premiums.

Once you purchase a life insurance policy, and pay taxes on the contributions to the plan that are being used to pay life insurance premiums, you have less money in the account to use for investing in other assets that remain tax-deferred. 

For example: If you have $200,000 in your Solo 401k in 2019 and you spend $8,000 on life insurance premiums for that year, not only do you have to pay taxes on the $8,000, but now you only have $192,000 (less taxes paid) in your account to invest in investments with the tax-deferred status.  Many life insurance policies have cash value accumulations built into them; however, most investments a smart investor can make will give a better return than that of a life insurance policy. 

Who can be the recipient of life insurance purchased by the Solo 401k? 

An insurance policy purchased by the Solo 401k can be issued on the life of an accountholder, your spouse, child(ren),  family member, or any other individual with insurable interest. 

Who is the owner of the life insurance policy?

The trustee of the Solo 401k is the owner of any life insurance policies purchased by the Solo 401k. When purchasing the policy, the trustee will need to designate themselves as the owner and trustee of the policy. Outside parties are not able to be listed as the owner or trustee of a policy purchased by the Solo 401k. 

Disclaimer: We recommend that you check with a CPA when deciding whether or not to purchase life insurance within your Solo 401k.

Did this answer your question?