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Options for life insurance contracts in a terminating MPP Plan


Lori H

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The article seems to explain this option differently, if I am understanding it correctly (see #4 on the fourth page of the article). It says the Trustee of the plan takes the loan from the policy and can roll the proceeds of the loan into an IRA. Is that right? It feels a little like a PT?

I like your version much better!

Not the loan, but the proceeds from the loan. At that point it's just cash and an asset just like any other asset.

Let me ask this, how would the loan be handled in a terminating plan or would that not even come into play?

Also, it's not certain the participants who are covered in this plan have the cash to buy the policies and have them assigned, if this plan were to stay frozen would there be pros/cons to that. Technically, the corporation is planning to be in existence for 5 more years, but the employees/participants are employed by another entity at this time.

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i can only assume your client doesnt have the resources to buyout the whole life policy at this time since he wants the insurance. It would seem to me that putting the plan into a DC plan just kicks the can down the road.

True, but might be the lesser of evils.

I wonder about the circumstances surrounding the plan termination. This appears to be a very large policy, perhaps for an owner; is there a change of ownership? If the idea is to get rid of the MPP might it better be simply restated as a PSP? Otherwise Bill Presson's suggestion of borrowing out some or most of the cash value before distributing or buying the policy is good, just be careful because a stripped-out policy can be expensive to maintain.

(When I was new to the business, I asked my boss, a life insurance salesman/TPA "why should life insurance be in a qualified plan?" His answer: "To make a commission." That is really the only reason; it pretty much stinks at the end of the road for the participant.)

Yes, the company is being shut down and merged with a hospital group, so there will be no restatement. The few doctors that have policies and need to keep the coverage are just considering to keep the plan frozen and pay the annual admin fees. Technically the practice will be in existence for the next 5 years. The face amount is appx $800,000 and the csv $311,239

I agree life insurance has no business being in a qualified plan. You can earn more using other products. My dad always said that and he was a life agent.

When I was in the law firm's Plan, I invested in the whole life insurance for a while. I was a single mother at the time and the life insurance option allowed me to leverage my Plan account balance. I invested say $1200 a year in a life insurance policy that had a death benefit of say $200,000. In the event of my death, that investment was more beneficial to my child than the $1200 staying in the Plan. I did cash it in once he went to college (12 years ago) and invested the proceeds in the other Plan options.

YMMV

you would have done better if u just purchased term outside the plan although 1200 a year isnt a big deal. in these cases being disucssed, we are talking about a lot more per year and keeping money within whole life within a qualified plan means at retirement you need to come up with a chunk of change to keep the insurance, find some creative way to keep and pay for it in a plan that can hold it. or be forced to surrender it. whole life is a mistake if you dont need or desire a permanent death benefit. you may have felt you wanted a permanent death benefit at the time you purchased it which is fine but if you didnt then it isnt the correct decision for most people. Additionally if you had been fired (which is probably a real concern now a days with economy more so than usual) you are forced into a situation where you now dont have a job and either need to buy it out or surrender it. For many that is a surrender for a loss.

i should add that if this was done prior to 2005 then the IRS was less clear about fair market values of life insurance and you likely could have purchased the insurance out of the plan for a "good deal". Now a days that is less likely to fly.

You may be right about ding better with term outside of the Plan, but that would have been $1200 (or whatever the premium was 20 years ago) out of my pocket and this contribution was made into my account by the firm. And $1200 can be a big deal to some people. My point was that in some instances, life insurance thru a QP can look attractive to particpants - whether or not whole life is the best option for them.

Why would I have had to surrender it if my employment had been terminated ? I would have just left the money and the policy in the Plan. Or was there some rule about having to use current contributions for the premiums and there was a limit of 50% of those premiums ?

As I said, its been a few years - I left there 6 years ago and haven't rolled over my account yet.

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You may be right about ding better with term outside of the Plan, but that would have been $1200 (or whatever the premium was 20 years ago) out of my pocket and this contribution was made into my account by the firm. And $1200 can be a big deal to some people. My point was that in some instances, life insurance thru a QP can look attractive to particpants - whether or not whole life is the best option for them.

Why would I have had to surrender it if my employment had been terminated ? I would have just left the money and the policy in the Plan. Or was there some rule about having to use current contributions for the premiums and there was a limit of 50% of those premiums ?

As I said, its been a few years - I left there 6 years ago and haven't rolled over my account yet.

i just want to be clear im not attacking you but just trying to provide information so people reading these threads dont make the wrong choice. it does look attractive until you realize why it isnt. at first glance it seems like you get this great benefit which some agents like to talk about getting as tax free (which it isnt). Problem isnt the upfront situation, its the end game. Lets say you keep a permanent policy for many years within a qualified plan. I assume one purchased it bc they thought they might want permanent insurance. If you end up actually either needing or wanting it, you need to cough up a ton of money to get it out of the plan or hope the plan stays in existance until you die. Even in this case here, the physician isnt likely to keep the plan going long term bc of costs of the plan itself. Even with his or her level of income, the costs of buying out a permanent life insurance can be overwhelming. The costs of whole life is very front loaded so if you dont do plan to keep it forever you have really have paid for something you wont use. If you want to put term in there, not as big a deal. In your situation you could of had likely 2 or 3 million of term for the same cost although of course no surrender value.

you eluded to potential problems that could have arisen in your situation if you kept going with the insurance instead of surrendering it. Even transfering the plan into some other qualified plan like a PS plan only kicks the can down the road. You cant put it into an ira so there will always be reasonably significant additional costs. since many of these plans are aimed at people with few employees, the chances of the DB plan lasting as long as you need it to decrease even if someone else is paying for the plan. There just isnt a free lunch here. It looks that way and agents love it bc likely you will buy a larger insurance product since you feel like you can do so since its pre-tax money.

This post pretty much summarizes how im sure this doc also got suckered into the 412i or placing insurance with a regular pension plan

http://lifeauditors.com/editorials/white-p...2e-db-plans.htm

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