Life and Death Planning for Retirement Benefits

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value, he would give the policy to a trust for his family, and the trust would exchange the
policy for another policy on the participant’s life. The new policy miraculously would have
a much higher value than the original policy. This was the type of valuation “game” that
cause the IRS to change the policy valuation rules in 2004–2005. See
F. ☹ Buy policy with tax-deductible dollars. Some advocate buying insurance inside a
retirement plan because this mode of purchase enables the participant to “buy insurance
with tax-deductible dollars.” This is not a valid reason to buy life insurance. Any investment
bought inside a retirement plan is bought with “tax-deductible dollars.” There is nothing
special about buying insurance as opposed to stocks, bonds, or mutual funds with the tax-
deductible dollars inside the retirement plan. In fact, buying life insurance makes the
“dollars” in the plan less “tax-deductible” than they otherwise would be, because insurance
necessitates the participant’s paying income tax on the Current Insurance Cost .
However, this idea lives on. See Travers, Brian, “Buying Life Insurance with Tax
Deductible Dollars” in the December 2014 issue of Trusts & Estates.
11.4.05 Life insurance and IRAs and 403(b)s
403(b) plans may legally be invested only in annuity contracts and/or mutual funds;
however, a 403(b) annuity can provide “incidental life insurance protection.” Reg
A requirement of a valid IRA is that “No part of the [IRA’s] funds will be invested in life
insurance contracts. The guaranteed death benefit under an annuity contract generally
does not violat Specifically, “An individual retirement account may invest in annuity
contracts which provide, in the case of death prior to the time distributions commence, for a
payment equal to the sum of the premiums paid or, if greater, the cash value of the contract.” Reg.
Thus, an IRA can hold an annuity contract that provides this type of incidental
death benefit.
Since that regulation was written, annuities sold to IRAs have begun to provide guarantee
death benefits well beyond the return-of-premium; typically, guaranteeing a minimum rate of
return, or a payout that is equal to the highest value attained by the contract as of particular
valuation dates. Is there reason to be concerned that these more extensive death benefits are edging
into the forbidden category of life insurance?
Although there is no IRS pronouncement directly on point, it seems unlikely that such
guarantees (as long as they are tied to some combination of premiums paid plus minimum
guaranteed growth and/or cash values attained during life) would be considered “life insurance.”
The IRS will presumably defer to state insurance commissioners in the characterization of these
products as annuities rather than life insurance. The IRS’s own valuation rules for IRA-owned
annuities recognize the existence of these beyond-premiums-paid guarantees, without raising any
questions of this type (see .
When a participant wants to buy (actual) life insurance, and the only money he has
available to use for this purchase is inside an IRA, he has the following choices:
A. Roll money to a QRP. One approach is to roll over money from the IRA into a QRP,
where it can be used to buy insurance. This solution helps an IRA owner who happens to
participate in a QRP that accepts rollovers and permits insurance purchases. If the IRA
owner has no QRP available, but does have a business, some planners recommend having
the business start a QRP so that the IRA owner can roll his IRA money into it (and buy