Insurance used purely as an investment??

[Dennis Povloski]

Is it possible to invest in a life insurance policy on a participant within a cash balance plan with the plan's death benefit being defined as the PVAB? So the insurance policy is basically just an investment of the trust, not a vehicle for providing a death benefit.

I guess the real question is, do the incidental benefit rules on insurance not apply if the plan's death benefit is just the PVAB?

I know this seems silly (why would you pay for a death benefit that you couldn't have), but I was asked the question, and I can't seem to find anything in writing that addresses the topic.

I was told that you can't buy life insurance that provides a benefit in excess of the plan's defined death benefit, but again, I couldn't find that in the regs either.

Any thoughts anyone? Thanks!

[ETA Consulting LLC]

This question can be answered with a thought: The incidental rules are written to ensure that the plan doesn't exist for the purpose of investing in life insurance. In other words, life insurance must be 'incidental' to the purpose of the plan. Accordingly, the incidental rules provide a mathematical standard; meaning one that can be calculated (and not subject to facts and circumstances).

Once you apply that pattern of thinking, you'll likely have your answer

Good Luck!

[Belgarath]

Going purely from memory, try Revenue Ruling 2004-20. I THINK this addressed deductibility of premiums on insurance in excess of the death benefit to which the participant was entitled under the terms of the plan. Basically, not currently deductible.

I believe that it is possible to purchase "key man" insurance as an investment of the trust. Perhaps not prudent, but possible. In that case, I'd assume it is considered just like any other plan investment. However, again, that's from memory.

Maybe that will get you started, anyway. I'd advise that your client seek ERISA counsel before wallowing in the life insurance swamp in a DB plan, particulalry if they aren't strictly using the incidental limits as ETK mentioned.

[My 2 cents]

Is Key Man insurance something relevant to a pension plan? I had thought that Key Man insurance is there to protect the sponsor in the event an irreplaceable employee were to die. Why handle that in the pension plan?

[Effen]

You should also take a look at the "listed transactions". I believe it is a $200,000 fine if the insured death benefit exceeds the plan's death benefit by more than $100,000. You can just search "listed transaction" on this board and you will a lot of posts on the subject.

[ETA Consulting LLC]

Is Key Man insurance something relevant to a pension plan? I had thought that Key Man insurance is there to protect the sponsor in the event an irreplaceable employee were to die. Why handle that in the pension plan?

I think I mis-read the original question. I agree with you.

[Belgarath]

I believe the theory on this, particularly in a non-PBGC plan, is (or maybe was) that if the business is extremely dependent upon the efforts of one or more "key" people, insuring their lives allows some assurance that the plan will have sufficient funds to pay promised benefits in the event the death of a key employee damages or destroys the profitability of the business, such that required funding cannot be met.

Can't say that I've ever seen it used, and I don't know how valid/viable the concept is under new funding/deduction rules...that's what those actuarial dudesses and dudes do!

[Dennis Povloski]

Belgarath - thank you! That revenue ruling has a very good example that illustrates what I was looking for!