Life Insurance in DB PLan

[Gary]

Say we have a 1 participant DB plan.

Under 74-307 the maximum death benefit allowed is either:

1. The proceeds from a life insurance policy where the premium represents less than 50% of the total employer contribution, plus the amount of the auxiliary fund.

My understanding of the auxiliary fund is that it is essentially the total value of the side fund that is used to fund the retirement benefit. Is that correct?

Of course the death benefit must be at least as much as the QPSA, which in this plan's case is a 100% j&s of the AB (unreduced).

2. The maximum of

- 100 times the projected monthly benefit or

- the reserve (not the face amount above) plus the auxiliary fund

My understanding is that the Reserve is amount obtained from the insurance company. That is, the actuary doesn't compute it based on what he considers reasonable assumptions. Is that correct?

So the two questions pertain to the auxiliary fund and the reserves.

Thanks.

[Gary]

And just to add a little more to the post as follows:

Regarding a plan with life insurance. Can a participant contribute a portion of the premium? I presume this would be a PT or perhaps simply a loan from employee to company to be paid back.

If a one participant plan pays the reserve of a policy that provides 100x benefit, plus the auxiliary fund, does the remaining proceeds revert to plan, thus causing a surplus, since no other participants? Not a good idea (it seems) to provide this type of death benefit in a 1 partiticpant plan.

Regarding the funding of a plan with life insurance there is the method known as envelope funding where the total retirement benefit normal cost is offset by the one year term cost of the life insurance. Is this term cost computed by the actuary determining reasonable assumptions? Or must the term cost be obtained (and used) from the insurance company? Not sure if this cost must actually be known anyway, since the premium covers the term cost and additional funds to create the cash value.

Thanks.

[SoCalActuary]

Two small points of interest:

1. a DB plan can require after-tax employee contributions. Those can pay for the cost

of the insurance, and therefore no PS 58 cost required.

2. the term cost is in addition to the regular cost for the normal retirement benefit.

You said the term cost is taken from the regular cost.

Retirement normal cost of $100,000

Term cost of insurance of $5,000

Scheduled premium to policy of $12,000

$105,000 is contributed, with $12,000 going into the policy, and $93,000 remaining in the investment fund.

Presumably, the policy then builds at least $7,000 of cash value.

[WDIK]

Presumably, the policy then builds at least $7,000 of cash value.

A plan can dream, can't it?