Paying for Life Insurance out of a Pension Plan?

[Jilliandiz]

I have a client who is curious if this can be done?

Can you pay for life insurance out of your pension plan?

Also, what are the restrictions, advantages and disadvantages?

Does anyone know where I would begin to make this change?

Would a new document have to be drafted?

Can someone please give me their feedback on this if you are knowledgable about it or have experienced it yourself?

Would you recommend it? I know nothing about this issue.

HELP!!

Thanks.

[mbozek]

LI can be used as a investment option in a qualified plan if it is made available to all participants although there are issues if only HCEs buy LI. Generally no more than 50% of the contribution can be used to pay the LI premium but there are different rules for term and whole life policies. The amount of the LI death proceeds after reduction for the cash value of the policy is exempt from income tax. The cash value is taxed as a distribution from the plan upon death of the employee or if the policy is distributed to the employee upon termination or can be rolled over to an IRA. The LI policy cannot be rolled over to an IRA.

LI can be used if the plan is amended to permit LI as an option.

From a financial perspective LI is not recommended because it uses up plan contributions to provide a death benefit usually through high cost individual policies. Some advisors like it because it permits the use of pre tax rather than after tax dollars to buy LI. My own view is that only those persons who have fully funding their retirement needs should invest pre tax contributions in LI.

[Ron Snyder]

The way the question was asked, it sounds as though it is referring to an existing policy outside of the pension plan. If such is the case, the pension cannot pay the premiums.

However, as mentioned above, the plan may choose to purchase a LI contract or contract to fund a death benefit under the plan. This would be more appropriate in a defined benefit pension plan (where the effect would be to increase employer contributions, sometimes a desirable end) than it would be in a defined contribution plan (where the effect would be to reduce retirement benefits).

[Jilliandiz]

Yeah, your right, I was asking about an existing policy outside the pension plan.

Thanks for your help!!!!!!!

[Guest PAUL DUGAN]

I disagree with mbozek regarding individual policies as an investment. 5 years ago I transfered existing whole life policies into my 401(k) profit sharing plan. For 2001 and 2002 the rate of return (calculated as year end CV - begining CV / begining CV+ premium) was just under 9%. That beat everything else I was invested in.

I use the CV as part of the bond investments in my diversified portfolio. Where else can I find a very safe bond paying 9%.

[Ron Snyder]

You "transferred existing whole life policies" into a 401(k) plan? That would be a prohibited transaction no matter which way you slice it. Moreover, I have a hard time believing unsubstanted assertion from someone who would engage in prohibited transactions in their retirement plan. You sound more like an insurance salesman than like the sponsor of a 401(k) plan.

[GBurns]

"5 years ago I transfered existing whole life policies into my 401(k) profit sharing plan"... What did you classify this contribution as being??? A rollover? An elective deferral? An "Extra" incidental LI purchase?

An explanation of this strategy would probably be greatly appreciated by all, I am sure.

[Belgarath]

Just a guess, but since I assume that no responsible Plan Administrator would allow a simple "transfer" into the plan I'm guessing that the plan purchased these policies from him, for their cash surrender value, utilizing Prohibited Transaction Exemption 92-5?

I'm not going to touch the investment angle, since I've seen many vitriolic discussions on these boards where folks on both sides of the issue will fight to the death. And they tend to get personal and sarcastic, which has no place on message boards that should be a model of professionalism. Not worth going there!