IRA and Life Insurance: Can You Use IRA Money to Buy Life Insurance?

Short answer: You cannot hold life insurance inside an IRA. The IRS prohibits it. But you can use IRA distributions to fund a properly designed whole life insurance policy outside of your IRA — and for the right person, this strategy converts a tax-burdened, government-controlled retirement account into a tax-free, self-controlled banking system.

Below, we’ll cover both questions: why the IRS won’t let you hold life insurance in an IRA, and how to strategically reposition IRA funds into whole life insurance when it makes sense. If you’re already familiar with the basics, skip to Should You Convert IRA Money to Life Insurance?

Can You Hold Life Insurance Inside an IRA?

No. The IRS does not allow Individual Retirement Accounts to hold life insurance policies as investments. This is a firm rule — not a gray area.

The logic: IRAs receive favorable tax treatment specifically for retirement savings. Life insurance provides its own separate tax advantages (tax-deferred growth, tax-free policy loans, income-tax-free death benefit). The IRS doesn’t allow you to stack both sets of tax benefits inside one vehicle.

There is one exception worth noting: certain employer-sponsored qualified plans — like 401(k)s and profit-sharing plans — can hold life insurance under the IRS “incidental benefit” rules. But this is a different structure entirely and doesn’t apply to individual IRAs.

If someone has told you that you can buy life insurance inside your IRA, they’re either confused or describing a strategy where you withdraw IRA funds and use them to pay premiums on a policy held outside the IRA. That’s a legitimate strategy — and it’s what the rest of this article covers.

Should You Convert IRA Money to Life Insurance?

This is the real question. And the answer depends on three things: your age, your tax situation, and whether you need every dollar in your IRA for retirement expenses.

Here’s the core problem with traditional IRAs that most financial advisors won’t say plainly: you don’t actually know what your IRA is worth until you withdraw it and pay taxes.

A $500,000 IRA balance isn’t $500,000. If you’re in a 24% federal bracket and your state taxes retirement income, your actual spendable balance could be closer to $350,000-$375,000. And you have no idea what tax rates will be when you need that money. The current rates under the Tax Cuts and Jobs Act are scheduled to sunset — and historically, rates have been significantly higher than they are today.

Add to that:

Required Minimum Distributions (RMDs) force you to withdraw — and pay taxes — starting at age 73, whether you need the money or not. These mandatory withdrawals can push you into higher tax brackets and trigger taxation of your Social Security benefits.

No asset protection. IRA funds are exposed to creditors in many states. A whole life policy’s cash value is protected from creditors in most states.

No death benefit. When you die, your IRA passes to heirs who must liquidate it within 10 years under the SECURE Act — and pay income tax on every dollar. A life insurance death benefit passes income-tax-free.

Sequence of returns risk. If the market drops significantly in the first years of your retirement, your IRA withdrawals lock in losses that your portfolio may never recover from. A whole life policy’s cash value isn’t correlated to the stock market — it provides a stable source of retirement income regardless of what markets do.

How an IRA to Life Insurance Conversion Works

The process is straightforward, but the details matter:

Step 1: Withdraw funds from your traditional IRA. This is a taxable event. You’ll owe income tax on the full amount withdrawn. If you’re under 59½, you’ll also owe a 10% early withdrawal penalty unless you qualify for an exception.

Step 2: Pay the tax from non-IRA funds if possible. You want to maximize the amount going into the policy. If you withdraw $50,000 and owe 24% in federal tax ($12,000), you want the full $38,000 net going toward premiums — not pulling additional IRA funds to cover the tax bill.

Step 3: Fund a properly designed whole life insurance policy. The policy should be structured for maximum cash value, not maximum death benefit. This means using Paid-Up Additions (PUAs) to accelerate cash value growth while staying below the Modified Endowment Contract (MEC) threshold.

Step 4: Spread it over multiple years. A 5-year funding strategy is common. Rather than withdrawing your entire IRA in one year and creating a massive tax bill, you withdraw a portion each year, keeping yourself in a lower tax bracket while steadily funding the policy.

IRA vs. Whole Life Insurance: Side-by-Side Comparison

For a deeper comparison of life insurance versus specific retirement accounts, see our guides: Whole Life vs. Roth IRA | 7702 Plan vs. 401(k) | Alternatives to 401(k)

Why Whole Life Insurance — Not Just Any Policy

Not all life insurance works for this strategy. Term insurance has no cash value — it’s pure death benefit protection. And within permanent life insurance, policy design matters enormously.

We recommend high cash value whole life insurance from a top-rated mutual insurance company for most IRA conversion clients. Here’s why:

Guaranteed cash value growth. Your cash value increases every year, regardless of what the stock market does. This is not a projection — it’s a contractual guarantee from the carrier.

Dividends from mutual carriers. Top mutual companies have paid dividends consistently for over 100 years. Dividends are not guaranteed, but the track record speaks for itself. Learn more about whole life insurance dividend history.

Uninterrupted compounding. When you take a policy loan, your full cash value continues earning dividends and guaranteed interest — even on the borrowed amount. Your money works in two places at once. This is the mechanism that makes whole life uniquely powerful as a compound interest vehicle.

Tax-free policy loans. Access your cash value through loans with no taxable event, no credit check, no approval process, and no mandatory repayment schedule. See our guide on borrowing against life insurance.

The policy becomes infrastructure, not just savings. This is the key insight most financial advisors miss. A properly designed whole life policy isn’t just an alternative place to park money — it becomes the foundation of a personal banking system where you control the capital, the access, and the terms.

What About IUL?

Some of our clients prefer indexed universal life insurance (IUL) for IRA conversions, particularly those who want market-linked upside potential with a floor protecting against losses. IUL can work well in this strategy when properly structured. For a comparison of the two approaches, see our guide: IUL vs. Whole Life Insurance.

Our position: whole life provides the contractual guarantees and uninterrupted compounding that make it the stronger foundation. IUL can complement that foundation for clients with specific goals. We’ll help you determine which structure fits your situation.

Who Should — and Shouldn’t — Convert IRA Funds to Life Insurance

This strategy makes sense if you:

Have a traditional IRA balance that exceeds what you’ll need for living expenses in the next 10+ years. You need time for the policy’s cash value to build before accessing it.

Are concerned about future tax rates. If you believe tax rates will be higher when you withdraw — and the historical data suggests they will — converting now at today’s rates and accessing funds tax-free later creates a significant advantage.

Want to leave a tax-free legacy. Your IRA heirs will owe income tax on every dollar they inherit and must liquidate within 10 years. A life insurance death benefit passes income-tax-free with no forced timeline.

Are a business owner or high-income earner with asset protection concerns. Cash value life insurance is protected from creditors in most states. IRAs have varying and often limited protection.

Want to eliminate sequence of returns risk from a portion of your retirement income. A whole life policy provides a guaranteed income source during market downturns, allowing your other investments to recover without forced liquidation.

This strategy does NOT make sense if you:

Need your IRA for near-term living expenses. Don’t convert funds you’ll need in the next 5-10 years.

Can’t qualify for life insurance. Health issues may make coverage unavailable or prohibitively expensive.

Have a small IRA balance. The tax hit on conversion plus insurance costs makes this impractical for small balances.

Are already in a very low tax bracket and expect to stay there. If your tax rate is already low and won’t increase, the conversion math is less compelling.

Frequently Asked Questions

Can I buy life insurance inside my IRA?

No. The IRS prohibits holding life insurance as an investment inside an Individual Retirement Account. You can hold life insurance inside certain employer-sponsored qualified plans like 401(k)s and profit-sharing plans under the incidental benefit rules, but not inside a traditional or Roth IRA.

Is an IRA-to-life-insurance conversion a taxable event?

Yes. Withdrawals from a traditional IRA are taxed as ordinary income in the year they’re taken. If you’re under 59½, you’ll also owe a 10% early withdrawal penalty unless you qualify for an exception. This is why a multi-year conversion strategy — typically spread over 5 years — helps manage the tax impact by keeping you in a lower bracket each year.

Should I convert my entire IRA to life insurance?

Rarely. Most clients convert a portion of their IRA — typically the amount they won’t need for living expenses within the next 10 years. Your IRA remains one component of your overall retirement plan. The life insurance policy adds tax-free access, asset protection, and legacy planning that the IRA cannot provide. A proper analysis considers your total financial picture, not just the IRA in isolation.

Is whole life or IUL better for an IRA conversion?

We recommend whole life for most clients because it provides contractual guarantees, uninterrupted compounding, and predictable cash value growth. Indexed universal life (IUL) can work well for clients who want market-linked upside with downside protection, but it introduces more variables and requires ongoing monitoring. See IUL vs. Whole Life for a detailed comparison.

What happens to my IRA when I die?

Under the SECURE Act, most non-spouse beneficiaries must fully liquidate an inherited IRA within 10 years — and pay income tax on every dollar withdrawn. A life insurance death benefit, by contrast, passes to your beneficiaries completely income-tax-free with no forced liquidation timeline. For estates that may be subject to estate tax, placing the policy in an irrevocable life insurance trust (ILIT) can remove the death benefit from your taxable estate entirely.

Can I use 401(k) money to fund life insurance?

Yes, through a similar process. You would withdraw or roll over 401(k) funds (triggering taxes), then use the net amount to fund premiums. Some employer plans also allow in-service distributions or direct purchase of life insurance within the plan under incidental benefit rules. See our guide on alternatives to 401(k) for more options.

How long before I can access the cash value?

With a properly structured policy designed for high cash value, you’ll have accessible cash value starting in year one. However, for an IRA conversion strategy, we recommend allowing at least 10 years of funding before taking significant loans. This gives the policy time to build a substantial cash value base that can support tax-free retirement income for decades.