When the insurance is no longer needed in the retirement plan there are different ways it can be removed from the plan. If it is simply transferred to the insured participant it will be a taxable distribution and the participant will pay tax on the value of the policy when it is transferred. To avoid a taxable distribution, the policy can be bought by the participant with outside funds to replace the value of the policy in the retirement plan. Either way, once the policy is outside the retirement plan, the new owner/insured may use the policy to take distributions providing retirement income outside the retirement plan or maintain cash in the policy to maintain a higher death benefit. If these distributions from the policy are managed correctly, they will not be subject to income tax.
