Life and Death Planning for Retirement Benefits

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460 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 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 , because the
policy insures both spouses. Thus, it may be necessary to seek a DOL PT exemption for
such a sale.
11.4.04 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