Life insurance in qualified plans refers to the use of life insurance contracts inside tax qualified retirement plans such as defined benefit, defined contribution, or profit sharing plans. Under IRS rules, life insurance can be included if it is incidental to the primary retirement benefit and certain percentage tests are met. Policies are usually owned by the plan and provide death benefits for participants, while a portion of employer contributions funds insurance costs. At retirement or plan termination, policies may be distributed or purchased by participants, with taxable value governed by regulations and PS 58 cost rules. Using life insurance in qualified plans can offer pre tax funding of some protection needs but also introduces complexity and administrative considerations.

In practical planning, advisors encounter life insurance in qualified plans mostly in older defined benefit or profit sharing arrangements, or in specialized designs for closely held businesses. They work with third party administrators and ERISA counsel to ensure that insurance remains incidental and that plan documents permit it. Over time, many employers have shifted away from life insurance in qualified plans toward separate, outside policies due to regulatory complexity and limited flexibility. When exiting such arrangements, advisors help participants understand the tax implications of taking policy distributions, including how PS 58 costs and basis affect income recognition. Some clients may choose to continue coverage personally after buying the policy from the plan. By understanding the history and rules of life insurance in qualified plans, producers can evaluate whether it fits modern planning goals or whether alternative structures, such as nonqualified plans or personally owned policies, offer cleaner, more flexible solutions.