Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
Regarding life insurance within a qualified retirement plan, which statement is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Life insurance can be included in a qualified retirement plan only within strict limits, generally under the incidental death benefit test. Because the employer's plan contribution funds the pure insurance protection, the employee must currently report the economic value of that protection, measured under the PS-58 or Table 2001 rules, as taxable income. Coverage that exceeds the incidental limits can disqualify the plan. The death benefit beyond the cash value is generally income-tax-free, but the cash value itself is subject to plan distribution rules.
Why the other options are wrong
- A) Life insurance is permitted in qualified plans under limited conditions; it is not always prohibited.
- C) The employee is currently taxed on the economic value of the insurance protection, so the employer's funding is not tax-free in the employee's hands.
- D) The cash value accumulation is subject to plan distribution rules, so the entire death benefit is not always fully income-tax-free.
Memory hook
Plan life insurance: allowed in a corner, taxed on the pure-protection cost, and strictly capped.