Back to basics

[SMB]

Can anyone tell me - in a nutshell, if at all possible - the benefit of purchasing life insurance in a DC plan (other than being able to pay the premiums with "pre-tax" dollars)?

Follow up: What are the ramifications and remedy/ies when a participant's life insurance (DC plan) premiums exceed the IRS "incidental benefit" limits (Doc, of course, who I think got sold a "bill of goods"!)?

Thanks!

[QDROphile]

The main benefit is the commission that is paid to the person who sold the policy.

[Archimage]

Funny answer but it is the correct one.

[SMB]

Dear QDROphile and Archimage,

Thanks for confirming what I already strongly suspected!

Any input from anyone who may have encountered a life insurance "incidental benefit" issue on audit?

Thanks!

[MARYMM]

The main benefit is the commission that is paid to the person who sold the policy.

From another perspective - that of a single parent whose employer allowed life insurance as an option - by electing insurance, I was able to parlay half of my employer's contribution (approx $500) into a $25,000 benefit to my family if I died. Yes, I could have purchased term insurance outside of the plan , but this way I did not have to pay for it out of my own pocket. As soon as the kids reached majority, I cashed in the policy.

[AndyH]

MaryMM,

Yes, you did pay for it, in several ways:

1. You should have received a 1099 at year end that should have been added as a tax liability on your tax return. This is called a "PS-58 cost".

2. You most likely earned a sub-standard return on the cash value of the policy. The insurance company and/or agent got the difference.

3. Many companies use bogus factors to compute the PS-58 costs. Those that do not pay their fair share cause taxpayers in general to pay more. [i know I know ..... but in theory this is true]

Your employer could have provided you with a $25,000 life insurance policy as a benefit to you outside of the plan and you would not have had to pay the PS-58 tax cost.

[MARYMM]

MaryMM,

Yes, you did pay for it, in several ways:

1. You should have received a 1099 at year end that should have been added as a tax liability on your tax return. This is called a "PS-58 cost".

2. You most likely earned a sub-standard return on the cash value of the policy. The insurance company and/or agent got the difference.

3. Many companies use bogus factors to compute the PS-58 costs. Those that do not pay their fair share cause taxpayers in general to pay more. [i know I know ..... but in theory this is true]

Your employer could have provided you with a $25,000 life insurance policy as a benefit to you outside of the plan and you would not have had to pay the PS-58 tax cost.

Yes, I did have PS-58 Costs ( I was the one who had to prepare the 1099's for that !) but they were not much and therefore the tax on it was not much. My employer did give me some term life insurance, but this option gave me a little more. I know it is not the wisest investment in a QP, but it does have some appeal to ee's whose estates are not huge

[jpod]

MARYM is absolutely correct, imho. While purchasing life insurance through a QP is a terrible idea if you can get it and afford it outside the plan, it is a terrific idea for someone who needs insurance and either can't afford it otherwise or if it's the only way he/she can get insurance without underwriting.

[Jim Chad]

jpod just hit the only reason I would ever recommend life insurance in a qualified Plan. Besides guarenteed issue of a policy, there is also the possibility of a very high premium because of health or hobby factors. For example: someone who skydives or has a history of heart problems might have to pay twice the normal premium. But the PS 58 will be at normal rates. I have seen a case where this made sense.

I have also heard of people who are seriously afraid of a depression wanting the guarenteed values along with all the stocks, but never seen one.

[AndyH]

I have also heard of people who are seriously afraid of a depression wanting the guarenteed values along with all the stocks, but never seen one.

Guaranteed value? In a depression?

Care to take that one back?

I repeat. What happened to the idea of group term life outside of the plan? Where is Ned?