Can a Life Insurance Policy Be Rolled Over to an IRA?

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Life insurance protects your family by providing death benefit protection in the event of your death. Any financial obligations you have when you die can be paid for with the insurance proceeds. If you own a cash value life insurance insurance policy, your policy will have an equity value, called a "cash value." This cash value is a savings that can be used for any purpose during your lifetime. If you find that you no longer want your life insurance policy, you must know what your options are for transferring the funds out of your policy.

Misconceptions

  • Life insurance may seem like an investment, but it is an insurance contract. Because life insurance uses after tax contributions and is not a retirement account, you cannot roll your money into an IRA in the same way that you can roll an IRA into another IRA. However, you may transfer money into an IRA using the withdrawal and policy loan provisions of your life insurance policy.

Process

  • Call your life insurance company. Request a withdrawal or policy loan for the maximum amount that your IRA will accept. As of 2010, your contribution limit is $5,000 if you are under 50 years of age. It's $6,000 if you are 50 or over.

Significance

  • The significance of transferring money into an IRA is that you will be moving money from your tax sheltered insurance policy to a tax sheltered, government sponsored, retirement plan. You may have more investment options inside of the IRA than you do in your life insurance policy. However, if you deposit money into a traditional IRA from your life insurance policy, you will be making after tax contributions which negates the benefits of pretax contributions to an IRA.

Warning

  • If your life insurance policy lapses due to excessive policy loans, all of the money you've taken out of the policy will be considered income taxable at ordinary income tax rates. This tax is due in the year that the policy lapses, and is based on any cash value that exceeds the total premiums paid by you into the policy.

Considerations

  • Consider transferring money into a Roth IRA if you are going to contribute to an IRA, since the Roth IRA accepts after tax contributions and your life insurance policy accepts after tax contributions. There will be no loss of tax advantages by moving money from a life insurance policy to a Roth IRA. Alternatively, consider keeping your life insurance policy.

References

  • "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
  • "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
  • Publication 590: Individual Retirement Arrangements
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