Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

rates “if the life insurance protection covers more than one life.” Insurance experts do not find this computation difficult, despite the absence of an official table.

C. Prohibited transaction meets transfer-for-value. Attempting to sell a second-to-die policy to the participant creates a dilemma. The Department of Labor has indicated that PTE 92-6 ( ¶ 11.3.05 ) applies to second-to-die insurance policies on the life of the employee and his/her spouse as well as to single life policies on the life of the employee. PTE 92-6 exempts the plan’s sale of a life insurance policy from the PT rules provided that (among other conditions) the sale is made to the participant or beneficiary . This would not permit a sale of the policy to both the participant and the spouse ; the spouse is not the beneficiary of the policy (because it is a policy on her own life) nor is she the participant. However, if the participant alone purchases the second-to-die policy, this may be considered only partly a sale “to the insured” for purposes of the transfer-for-value rule ( ¶ 11.4.02 ), because the policy insures both spouses. Thus, it may be necessary to seek a DOL PT exemption for such a sale.

Reasons to buy life insurance inside the plan

Here are some reasons why people buy life insurance inside a retirement plan. “ ★ ” indicates a good reason. “ ☹ ” indicates a less good reason.

A. ★ Client uninsurable. The client is rated or uninsurable, and wants to buy insurance, and there is a policy available through the plan that the client can purchase without evidence of insurability. B. ★ Favorable group policy available through plan. The plan may have a negotiated group insurance rate that is lower than the rate the participant would have to pay if he bought the insurance outside the plan. C. ★ Increase defined benefit plan contribution. It is possible in some cases that the purchase of insurance, as an incidental death benefit, could increase permitted contributions to a defined benefit (DB) plan (or help absorb some funds in an overfunded DB plan). See McFadden, J.J., and Leimberg, S.R., “Fully Insured 412(I) Pension Plans Offer Simplicity and Low Risk,” 30 Estate Planning 4, p. 155 (April 2003). D. ★ Only available money is in the plan. The client needs life insurance but has no money to pay for it outside the retirement plan. In this case, however, first consider, instead, taking some money out of the plan to buy the insurance. Unless the client cannot get money out of the plan (due to unacceptable level of tax on plan distributions, creditor or marital problems, or because the plan doesn’t permit it), the purchase of insurance outside the plan may be more tax-effective. E. ☹ Minimize tax on plan distributions. A discredited planning strategy involved pouring plan assets into a life insurance policy, which (due to inflated surrender charges and other valuation gimmicks) had a cash value that was much less than the amount the participant had invested. The policy would then be distributed or sold to the participant at the depressed