Buying Life Insurance Within an IRA: A Step‑by‑Step Guide

Eligibility and IRA Type

Only a Traditional or Roth IRA can hold a life‑insurance policy; a Simplified Employee Pension (SEP) or SIMPLE IRA does not permit it. You must have earned income, be under the contribution limit for the year, and the policy's cash value must not exceed the IRA's total balance.

Contribution Limits and Tax Impact

Contributions used to fund the policy count toward the annual IRA limit ($6,500 for 2024, $7,500 if age 50 or older). Because the IRA is tax‑advantaged, the policy's cash value grows tax‑deferred, and withdrawals for qualified distributions remain tax‑free in a Roth or tax‑deferred in a Traditional IRA.

Selecting a Policy

Choose a permanent life‑insurance product—typically whole life or universal life—since term policies lack cash value. Compare premium schedules, surrender charges, and the policy's projected cash‑value growth. A compact comparison helps:

Purchase Process

1. Open or verify an existing IRA with a custodian that allows insurance holdings.2. Submit the insurance application, naming the IRA as the owner and the insured as the beneficiary.3. Fund the initial premium from the IRA, ensuring it stays within the contribution limit.4. Once approved, the policy's cash value is held inside the IRA and can be accessed per the account's distribution rules.

Key Considerations

• Fees charged by the IRA custodian for holding insurance can reduce returns.
• Required minimum distributions (RMDs) from a Traditional IRA may force you to withdraw cash value, potentially incurring taxes.
• Policy loans are limited to the IRA's distribution framework; they cannot exceed the IRA's balance.