Transfer of Life Insurance into Plan

[Guest]

I've seen life insurance transferred from a plan by the participant paying its cash value. Can it work in reverse? In other words, can policies held outside a plan be purchased for their cash value as long as the accrued annual 25%/50% limits are not exceeded? Thanks.

[imchipbrown]

Thornton,

I believe its OK. Check out the Prohibited Transaction Class Exemption (don't have my references at home).

Remember, once in the plan, there is annual "PS 58" imputed income to the participant.

[Dowist]

Don't you lose the income tax exlcusion if you put it in the plan? Also no opportunity to get it out of your estate?

[Guest Paul McDonald]

The relevant Prohibited Tranaction Exemption is PTE 92-5 which exempts the transfer of individual life and annuity contracts into a plan.

The cash surrender value net of PS-58 costs (basis) is income taxable at death. The net amount at risk (pure death benefit equal to face amount minus cash value day before death) is income tax free. The death benefit is included in the estate as the participant has incidents of ownership in the contract.

PTE 92-6 deals with the ability to sell an insurance contract or annuity from the plan to the participant, a relative who is the beneficiary under the contract, the employer, or another employee benefit plan.

Both PTE's have conditions that must be followed in order for the exemption to apply.