What is a Combination Plan?
My Pension Tree, LLC
5 min read • Published • Updated
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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.
A combination plan is a kind of retirement benefit arrangement that incorporates life insurance and trust funds, which are often referred to as side funds or conversion funds. The aim of this plan is to merge the guarantees of insured death benefits with the potential for higher returns offered by more aggressive investments.
How it Works
In such cases, every employee’s retirement benefits will be funded from two sources.
- Whole Life Policies: These policies grow in cash value over time and contribute to the retirement benefit.
- Side Fund: This special fund holds additional assets that are invested in a more aggressive manner.
During retirement, whole life policies are surrendered and the participant’s retirement benefit comes from policy cash values combined with an amount withdrawn from the side fund. Side fund ensures that there are enough assets to pay for retirement benefits since whole life policies accumulate cash value slowly.
Why Use a Combination Plan?
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.
- Balanced Approach:
- Safety and Growth: It combines insured death benefits’ security and more aggressive investment in assets within the side fund thus potentially giving higher returns on investments.
- Flexibility:
- Tailored Funding: The actuarial methods for calculating for the side fund can be modified within reasonable bounds thus providing flexibility in funding the program.
- Smaller Plans:
- Economical: This plan is especially suitable for small pension plans having less than twenty-five workers hence making it feasible for business owners with small businesses.
- Example Scenario:
- Dr. X’s Plan: A sole practitioner doctor named Dr.X who earns an annual salary of $200,000 at age forty five adopts this combination plan where he would have to pay premiums on insurance coverage plans as well as make additional deposits into a side fund based on actuarial calculations.
Combination Plans offer business owners an efficient solution that balances risk and flexibility when raising money for retiree benefits; they provide life insurance policies while allowing greater returns via side-fund investments, thus resulting in a quite an efficient solution for small to medium sized pension plans.
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.