"The weeks immediately following tax season are an especially good time to educate clients about how life insurance can help mitigate income taxes," says Elizabeth Sampson, a Beverly Hills, Calif.-based certified financial planner. "There's a greater awareness about tax-related issues among clients, especially those who got hit with a big tax bill."
That education process, sources tell National Underwriter, can start with an examination of the client's income tax return, specifically the taxable investments that cause clients the most pain come April 15. Among them: mutual funds, certificates of deposit, money market funds and bonds. By shifting funds from these taxable investments to tax-deferred vehicles, an advisor can reduce the client's tax liability and boost retirement savings.
Proper tax planning, conversely, can free up dollars to purchase additional insurance needed for the death benefit.
"What you're trying to do as an advisor is to reduce the tax burden through the use of tax-qualified savings vehicles," says Paul Games, a certified financial planner and principal of Pathfinder Financial Group, Newburyport, Mass. "The savings would allow the client to allocate extra money to buy insurance." 
Enter permanent life insurance. The cash value component of a life insurance policy grows tax-deferred. And, at the insured's passing, death benefit proceeds are distributed to beneficiaries income tax-free.
Because of its preferential tax treatment, experts say, life insurance is often favored by business owners for funding employees' qualified retirement plans. Within the defined contribution plan arena, these include 401(k) plans, employee stock ownership plans (ESOPs), profit-sharing plans and, among non-profits, 403(b) plans.
Companies pay the life insurance premiums with tax-deductible dollars using income generated by 401(k) plan assets, such as a bond or mutual fund. Contributions to the premiums are generally limited to 25% of the owner's annual retirement plan contributions. (The IRS, however, regards the premium as taxable income.)
Permanent life insurance can also fund a traditional defined benefit or pension plan, which avail employers of the greatest potential tax savings. The reason: Tax-deductible contributions used to pay the premiums can exceed the IRS limit on defined contribution plans. (For 2010, total employer and employee contributions to a DC plan must be lesser of 100% of the employee's compensation or $49,000.)
"With a defined benefit plan, the business owner can potentially secure a very substantial income tax deduction," says Sampson. "And the tax-deductible dollars are used to pay for a needed asset–life insurance–which itself enjoys tax-favored treatment."
Funding a defined benefit with permanent insurance, observers say, carries other advantages. Among them: the business can complete retirement funding in the event of a premature death, the beneficiary receiving the death proceeds and the accrued benefit. And policies are portable. At an employee's termination or retirement, the insurance coverage can be continued, eliminating the need to convert to costly group insurance.
Tax benefits aside, experts caution that life insurance is only suitable inside qualified retirement plans for businesses that can count on a steady revenue stream.
"Funding a pension with life insurance requires consistent profitability," says Vincent Aimetti, a chartered financial consultant and agent at National Legacy Group, New Canaan, Conn. "Businesses that experience a lot of volatility in income are not good prospects because they may not be able to maintain the premiums."
