In some situations, it may make sense to hold life insurance inside a tax-deductible retirement plan. The big advantage of this approach is that it enables you to buy life insurance with tax-deductible dollars.
Instead of your having to earn, say, $15,000 to pay a $10,000 premium, that same premium can be paid with $10,000 worth of earnings, inside a retirement plan. If you can’t afford needed life insurance as well as a fully funded retirement account, combining the outlays may help you reach both goals.
If your retirement plan pays for your life insurance, you usually will pick up taxable income each year, based on the value of the life insurance received. Generally, though, the amount of taxable income is not great, compared with the insurance protection received. What’s more, any income you recognize now will result in a lower tax bill in the future, if the policy is withdrawn from your retirement plan.