Life Insurance at Termination of Plan

[12AX7]

A 401 (k) Plan is now being terminated. One participant has life insurance with cash value. The advisor for the plan wants to strip out the life insurance, place these proceeds into the cash portion of participant's account and distribute the contact without taxation. Is this still possible?

[Belgarath]

Maybe. It depends upon whether the Fair Market Value of the policy, after stripping value out via a loan or withdrawal or whatever, is zero. The insurance company should be able to confirm whether this will be the case or not. Some policies have much higher Fair Market Value than Cash Surrender Value (which is what led to all the new guidance being issued in the first place.)

[12AX7]

Thanks Belgarth for the insight. I'm waiting to hear back from the insurance company and wanted to know in advance what I have to look for.

[Belgarath]

Well, to get REALLY technical, there could be an amount remaining in the policy equal to the accumulated taxable term costs that the participant has declared as income, and the policy could then be distributed without taxation if the fair market value is no higher than that amount. But some insurance companies do not track this amount, so it could be difficult to obtain such a number.