Life and Death Planning for Retirement Benefits

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CHAPTER 11: INSURANCE, ANNUITIES, AND RETIREMENT
PLANS
Chapters 10 and 11 deal with the interaction between life insurance
and annuity contracts and retirement plans. Chapter 10 covers the
special set of “required minimum distribution rules” for immediate
annuities purchased in defined contribution plans. Chapter 11
covers life insurance and all other aspects of annuity contracts.
This Chapter explains the tax consequences (to the participant and beneficiaries) of life
insurance held inside a retirement plan explains the income tax rules applicable to the plan
participant and his beneficiaries when life insurance is held in a qualified retirement plan (QRP).
discusses the choices regarding the policy that arise at the participant’s retirement. See
for the estate tax consequences and other planning considerations with respect to plan-
owned life insurance.
This book discusses plan-owned life insurance only from the perspective of the participant
and beneficiaries. Rules that are of concern only at the plan level (such as the limits on how much
life insurance may be purchased in a QRP, and ERISA fiduciary investment rules) are beyond the
scope of this book. For other sources, see the Similarly, the analysis of insurance
products is beyond the scope of this book.
The Chapter begins with an assortment of retirement plan tax rules related insurance and
annuity contracts and ends with comments on various planning ideas involving insurance
and retirement plans .
11.1 Miscellaneous Retirement/Insurance Rules
Thi ollects miscellaneous retirement plan tax rules related to insurance and annuity
contracts.
See also (exception to the 10% penalty on pre-age-59½ distributions for certain
health insurance premiums of an unemployed person).
11.1.01 The three valuation rules for annuity contracts
Strangely, annuity contracts held in a retirement plan or IRA are valued in different ways
for different purposes.
Rule #1: Valuation for purposes of required minimum distributions. Reg.
A-12(a), explains how an annuity contract held inside a defined contribution (DC) plan is to be
valued for RMD purposes. The method described here may NOT be used to value a contract for
purposes of a Roth IRA conversion (see Rule #3).
Prior to the Annuity Starting Date , a variable annuity resembles a mutual fund
portfolio held in an annuity “wrapper.” A variable annuity contract, until it is annuitized, behaves
like a DC plan. The contract has a cash value which is like an account balance in a DC plan; it
fluctuates with investment performance.
Not surprisingly, the regulations treat variable annuity contracts according to the DC plan
rules for RMD purposes. Reg. A-12(a). The participant determines his RMD with