REASONS FOR LIFE INSURANCE IN QUALIFIED RETIREMENT PLANS
- Premium Deductibility
- Estate Tax Exemption
- Participant & Spouse Estate Tax Exemption
- 58 Recapture
- Avoid Group Term Cost
- Guaranteed Issue
- More Favorable Underwriting
- Ratings Are Deductible
- Recovery of Investment Fund Upon Death (Defined Benefit)
- Satisfy Qualified Pre-Retirement Survivorship Annuity
- Optional Life Insurance (Defined Contribution)
- Self Completion Planning
- Personal Insurance Purchased With Pre-Tax Dollars
- Free Up After-Tax Dollars for Saving or Spending
- Front-End Expenses Absorbed By Plan
- Seasoned Policy Transfer
- Valuable Fringe Benefit
- Avoid Group Term Conversion Charge
- Portability
- Appropriate Balanced Investment Funding Vehicle
- Compensate For Severe Tax Loss Upon Death
- Income Tax Free Death Benefit (Net Amount At Risk)
- Insurance On Others Under Profit Sharing Plans
- Survivorship Life Insurance Under Profit Sharing Plans
- Key Person Life Insurance Under Profit Sharing Plans
- Charitable Gift Life Insurance Through Qualified Plans
- Partial Funding For Buy/Sell Agreement
FEATURES OF LIFE INSURANCE IN QUALIFIED RETIREMENT PLANS
Do you buy your life insurance wholesale or retail? When buying life insurance through a qualified plan, you get a government discount.
Life insurance proceeds are exempt from estate tax if paid to a spouse.
- Participant & Spouse Estate Tax Exemption
Proceeds may be able to bypass both the employee and spouse’s estates with a sub-trust.
P.S. 58 reportable income reduces taxable income on distribution, either when the benefits are paid from the policy upon death, retirement, disability or termination, or when the policy is distributed as an annuity. Table I costs for group term insurance are not basis; you do not get back what was spent on them.
Life insurance in a qualified plan removes the need to carry group term insurance, and at the same time, permits much larger amounts of life insurance on highly paid stockholder employees and key people. These larger amounts would be discriminatory under rigid group term life insurance regulations.
Amounts of standard life insurance can be purchased for substandard risks based upon the requirement of a reasonable number of participants.
- More Favorable Underwriting
Amounts of life insurance in excess of guaranteed issue might be available on a more favorable basis for some substandard risks based upon the purchasing power of the entire group of participants.
When guaranteed issue is not available and an extra sub-standard premium is required, the rating charged is a deductible expense to the plan sponsor and does not become imputed as income to the employee.
- Recovery of Investment Fund Upon Death (Defined Benefit)
In a defined benefit plan, the risk of death is transferred to the insurance company. Any side fund accumulated for the participant is returned to the plan as a pre-paid credit for the remaining participants, substantially reducing the employer’s costs, or could justify a plan revision to increase benefits.
- Satisfy Qualified Pre-Retirement Survivorship Annuity
Life insurance in a defined benefit plan satisfies the qualified pre-retirement survivorship annuity requirement, thereby permitting recapture of the other plan assets.
- Optional Life Insurance (Defined Contribution)
In a money purchase, profit sharing, 401(k) or target benefit plan, each employee may be given the option of selecting life insurance purchasable by up to 50% of his/her contribution using whole life insurance or 25% using universal life or term insurance. Consider this: If it were not such a good deal, the government would not have put limits on it.
When an employer establishes a qualified plan, the employee relies on the projected future benefits and coordinates them with his/her personal retirement planning. Therefore, provision must be made to assure that the funds will be available for the spouse if the employee should die before completing the accumulation of planned retirement funds. Life insurance within the plan is the most efficient means of doing this.
- Personal Insurance Purchased With Pre-Tax Dollars
Any life insurance a participant elects to purchase in a defined contribution plan is being purchased with pre-tax dollars. Do not forget the use of rollover dollars as well. Upon termination of a pension plan, rollover of those pre-tax dollars into a qualified plan (even a de minimis profit sharing plan) rather than an IRA, leaves them available for the purchase, or continuation, of life insurance.
- Free Up After-Tax Dollars for Saving or Spending
Life insurance under a qualified retirement plan reduces an employee’s need to pay for personal life insurance with after-tax dollars, thereby freeing up those dollars for personal savings and investment or for personal lifestyle spending.
- Front End Expenses Absorbed By Plan
The front-end expenses associated with purchasing an insurance policy are borne by the plan, not the participant.
Qualified plans may be used to season policies. Acquisition costs are absorbed by the plan. Once the policies have been seasoned, the participant may recapture the insurance and put it to work personally.
Premature death is often of more concern to an employee than retirement, particularly at the younger ages. Life insurance under a qualified plan becomes an appreciated fringe benefit.
- Avoid Group Term Conversion Charge
Group carriers generally charge $60 to $70 per $1,000 on conversion of group insurance. This problem is eliminated if the qualified plan is the source of employer provided life insurance death benefits.
Life insurance is fully portable in the event of termination or retirement. The policy may be distributed with or without the cash value.
Continuing premiums will be at the low rate originally paid when the qualified plan purchased the policy. The premiums may have already vanished, or dividends may be in excess of premiums.
A net amount at risk exchange may also be available. If such exchange is to an irrevocable trust or third party owner, immediate estate tax excludability may be accomplished.
- Appropriate Balanced Investment Funding Vehicle
Life insurance becomes the “high grade bond” portion of a balanced investment portfolio for the assets of a qualified plan.
- Compensate for Severe Tax Loss Upon Death
Distributions from qualified plans upon death can result in shrinkage of up to 50% due to income tax liability. In addition, if no spouse is living at the participant’s death, income, estate and excise taxes can absorb 85% or more of his/her accumulated plan value. Net insurance proceeds, after estate tax shrinkage, could go a long way toward paying some of these taxes and preserving plan assets for the participant’s heirs.
- Income Tax Free Death Benefit (Net Amount At Risk)
Under a qualified plan, the pure amount of life insurance (the face amount less the cash value) is distributed to the participant’s beneficiary income tax free upon death.
- Insurance On Others Under Profit Sharing Plans
Under a profit sharing plan, a participant may elect to use a portion of his/her contribution for the purchase of life insurance on a spouse or other person in whom there is an insurable interest, provided the plan permits such purchase.
- Survivorship Life insurance Under Profit Sharing Plans
As long as the plan provides for it, the purchase of survivorship life insurance is permissible under a profit sharing plan, thereby using pre-tax dollars to meet personal estate planning needs.
- Key Person Life Insurance Under Profit Sharing Plans
Profit sharing plans, as well as ESOP’S, may purchase life insurance on a key person for the benefit of all plan participants, provided there is a provision in the plan permitting such purchase.
- Charitable Gift Life Insurance Through Qualified Plans
Naming a charity as beneficiary of life insurance under a qualified plan is a wonderful way of finding an easy premium source for providing an attractive policy to meet a charitable obligation. The participant also retains the flexibility to change the beneficiary designation in the future if his/her charitable priorities change.
- Partial Funding For Buy/Sell Agreement
Life insurance on a fellow shareholder or partner may be purchased through a participant’s pre-tax profit sharing account, provided the plan permits such a purchase. The net amount at risk death proceeds may then be distributed to the participant tax free for use in cross purchase funding.
In addition, if a reduced value for a corporation or partnership can be justifiably substantiated, the desired excess value in a buy/sell agreement can be funded with deductible premium life insurance on the life of the participant under a qualified plan.
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