In 2026, the IRS lets you defer $24,500 into a 401(k), plus catch-up contributions once you reach 50. For a business owner earning several hundred thousand dollars a year, that limit may cover only part of what they want to set aside for retirement (IRS, 2026 limits). Every pre-tax dollar you eventually withdraw is taxed as ordinary income.
The Landscape Has Shifted
Two changes matter for business owners this year. The One Big Beautiful Bill Act made today's federal income tax brackets permanent, so there is no longer a scheduled rate increase, though Congress can always change the law. And under SECURE 2.0, higher earners above an IRS wage threshold must now make 401(k) catch-up contributions on a Roth basis, which removes the up-front deduction on those dollars. When qualified plans are the only tax-advantaged tool in use, it's worth looking at what else is available.
Where Permanent Life Insurance Fits
Permanent life insurance is first a death benefit for the people who depend on you, and it requires health underwriting. Section 7702 of the tax code defines how it is taxed. Inside a permanent policy, such as whole life or indexed universal life, cash value grows tax-deferred. Later, you can access it through withdrawals up to your cost basis (generally the premiums you paid) and through policy loans, which are generally not taxable income while the policy stays in force and is not a modified endowment contract (MEC). Life insurance cash value is also not subject to required minimum distributions.
There are real limits. The tax code caps how much premium a policy can take relative to its death benefit; fund it beyond those limits and it becomes a MEC, and loans and withdrawals are then taxed gain-first, with a possible 10% penalty before age 59½. Policy loans and withdrawals reduce the cash value and death benefit, and loans accrue interest. If loans grow too large and the policy lapses, the gain can become taxable all at once. Policies carry insurance charges, fees and surrender charges, and cash value typically trails premiums paid in the early years. Indexed crediting rates and whole life dividends are not guaranteed and can be changed by the insurer.
Why Some Business Owners Consider It
For business owners with variable income and most of their net worth tied up in the company, a properly funded policy can add a source of funds outside the business, accept larger premiums in strong years within the policy's limits, and provide retirement cash flow that, when managed correctly, does not add to taxable income. It works best as a layer after you've captured your employer match and used your qualified plans, not as a replacement for them, and only for people who can fund it for many years.
Getting the Structure Right
The design matters as much as the product: the policy has to stay within Section 7702, avoid MEC status, and be illustrated with conservative assumptions. We build these strategies in coordination with your CPA and attorney as part of what we call the entrepreneur's family office.
Important information: Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Life insurance is not a bank deposit, is not FDIC insured, and is not insured by any federal government agency. Policy loans accrue interest and reduce the cash value and death benefit; a lapse or MEC status can trigger taxes. Indexed crediting rates and whole life dividends are not guaranteed and can be changed by the insurer. Prospera Financial offers insurance products. This is general information, not tax or legal advice; consult your CPA or attorney.