Life Insurance in a Qualified Plan
My Pension Tree, LLC
6 min read • Published • Updated
Next step
Run your age-and-income number
Two inputs — your age and your compensation — give a modeled cash balance contribution for the current plan year in about a minute. It is an illustration built on stated assumptions, not a quote; the plan's actuary sets the final figure.
For businessmen who want to have an extensive program for employees, inclusion of life insurance in a qualified pension plan could be a viable move. In doing so, the plan buys and owns the insurance policy with tax deductible employer contributions used to fund it.
What is it?
The term “life insurance” means that purchased by and owned by the retirement plan. These policies are funded through tax-deductible employer contributions which presents an efficient way to provide life insurance to staff. This strategy can be particularly beneficial for addressing life insurance needs or filling gaps left by other company-provided death benefits.
Pros and Cons
Pros:
- Tax breaks: Oftentimes, premiums paid in respect of life cover under a qualified plan enjoy preferential treatment compared with those issued outside the plan or individually owned by employees.
- Protected Investment: Life insurance coverage is viewed as a secure investment choice in regard to qualified plans since it provides assured pension payments backed up by an insurer.
- Cost Predictability: Use of endowment products assists employers in planning for costs linked to qualified pensions funding.
- Wealth transference: Pure insurance part of the death benefit (the sum assured less any policy cash values) does not attract income taxes thereby making it a very efficient method used in wealth transference.
- Administrative Savings: A fully insured plan consisting solely of life insurance contracts or annuity contracts may avoid being subject to some funding standards plus actuarial certification requirements hence cutting down on administrative costs and complications involved.
- Greater Deductibility Of Contributions: Full-insured plans sometimes enable high initial deductible contributions unlike regular trusteed ones.
Next step
Run your age-and-income number
Two inputs — your age and your compensation — give a modeled cash balance contribution for the current plan year in about a minute. It is an illustration built on stated assumptions, not a quote; the plan's actuary sets the final figure.
Disadvantages:
- Lower Returns: Life insurances might confer lower returns than alternative forms of investment within their cash values on such policies’ holders.
- High Expenses: The charges imposed on these policies including commissions may be higher than for comparable investment alternatives.
Summary
When done right, qualified life insurance in a plan could bridge current benefit gaps and serve as a useful device for wealth transfer as well as employee retention. But it is essential to ensure that this insurance is distributed fairly to all employees and follows particular regulations in order to qualify.
Next step
Run your age-and-income number
Two inputs — your age and your compensation — give a modeled cash balance contribution for the current plan year in about a minute. It is an illustration built on stated assumptions, not a quote; the plan's actuary sets the final figure.