Life Insurance in a Defined Benefit Plan

Life Insurance Policy in a Defined Benefit Plan Provides Non-taxable Death Benefits to Beneficiaries of the Policy and Provides Asset Protection.
Many life insurers do not know about Defined Benefit Plan and its ability to hold a life insurance policy as an investment.
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life insurance in a defined benefit plan

What is the Benefit of Purchasing a Life Insurance Policy in a Defined Benefit Plan?

The primary benefit is that the premiums for the policy are paid from the contributions made to the defined benefit plan. The contributions are tax-deductible and this effectively makes the premiums tax-deductible too!

In this article, we will introduce defined benefit plans and how they can benefit self-employed or business owners with or without employees. This is only a basic introduction to a defined benefit plan and you can read more about it in other sections of our website.

How does life insurance in a Defined Benefit plan work?

A Defined Benefit Plan is a type of pension plan sponsored by an employer that gives the maximum possible benefit to the participants. It is an ideal solution for someone who is a business owner or a self-employed individual as it can help save for retirement while lowering taxable income.


Contributions to the defined benefit plan are based on the age and income of the owner. These amounts typically range between $100,000 to $300,000 and higher in some cases. The employees will receive between 5% to 7.5% of their compensation as a contribution to the profit-sharing plan. This design is called a floor offset plan and is used to provide the maximum benefits to the owners.

Defined benefit plan for self employed
Defined benefit plan for self employed

Integrating Life Insurance in a Defined Benefit Plan

Integrating life insurance in a Defined Benefit Plan offers a unique and advantageous strategy for both employers and employees. This integration can provide additional financial security and tax benefits.

Why Would you Include Life Insurance in a Defined Benefit Plan?

Life insurance can be purchased inside a defined benefit plan as the money in the plan can be used to pay the premium of the life insurance policy. Since the contribution to the DB plan is tax-deductible, the life insurance premiums are now being paid with pre-tax money.


However, the face amount of the life insurance and the premium amounts are subject to maximums calculated by the actuary. These amounts are based on the age and compensation of the individual participant. We can help you determine these amounts, please feel free to email us at info@pensiondeductions.com.


The entire contribution of the DB plan cannot be used to pay the insurance premiums. As such, a portion of the contribution will be used to pay the premium and the remaining amount will be invested as a side fund in non-insurance investments.


The insurance policy in the plan is typically a whole life policy or universal life policy. The face value of the policy will remain the same irrespective of the type of policy.

How much Insurance is Allowed?

Defined Benefit Pension plans generally use the 100x rule, which says insurance benefits are considered incidental if the face value is no more than 100 times the anticipated monthly annuity benefit provided by the plan.

How much Insurance is Allowed?

Defined Benefit Pension plans generally use the 100x rule, which says insurance benefits are considered incidental if the face value is no more than 100 times the anticipated monthly annuity benefit provided by the plan.

What Benefits are Paid at death?

If the insured person dies early, the beneficiaries of the life insurance policy receive the death benefit, less any cash value of the policy, free of tax. Any taxable economic benefit paid by the participant during their lifetime can be recovered tax-free from the cash value.

What Benefits are Paid at death?

If the insured person dies early, the beneficiaries of the life insurance policy receive the death benefit, less any cash value of the policy, free of tax. Any taxable economic benefit paid by the participant during their lifetime can be recovered tax-free from the cash value.
Contact us to buy Life Insurance Policy inside a Defined Benefit Plan.

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If you are interested in learning more, read our Comprehensive Guide for Defined Benefit Plans.
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