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Can life insurance be purchased inside a 403(b) program?


Guest wex4

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We have some clients who are University Professors and participate in a

403(b) plan. Several of them wish to purchase life insurance with 403(b)

funds inside the plan. They have been told this is not possible. However,

by hearsay, they have been told that with a schedule "c" they can establish

a qualified plan and purchase life insurance inside that plan. Further it

is their understanding that funds can be transferred from one qualified plan

to another without penalty or taxes due, and within the schedule "c"

qualified plan they can purchase life insurance. Is this true. Can you be

of any help or point me in a productive direction.

John Wekselblatt

"wex"

1095 Market St., # 701

San Francisco, CA 94103

http://www.zpub.com/wex/

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Life insurance may be purchased as part of a 403(B) plan as long as the insurance remains "incidental" to the plan. It is incidental as long as less than 50% of cumulative contributions represent cumulative life insurance premiums. (The 50% test reduces to 25% for term insurance and for universal life.)

Revenue Ruling 90-24 permits transfers of 403(B) funds from one account to another, just as long as the new account has withdrawal restrictions at least as rigid as the original account.

If life insurance is used, keep in mind that there is a current economic benefit that will be taxed to them each year (referred to as "PS58" costs). Also, remember that life insurance will not generate retirement funds as effectively as other investment vehicles, so it may be financially advantageous to but the life insurance outside of the plan. This is particularly important if the life insurance will be needed after retirement, since it cannot remain in the plan once required distributions begin.

Hope this is of some benefit to you. Good luck!

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along the lines of the previous post, they can obtain favorable tax advantages (with the exception of tax deductable premiums) by purchasing the life insurance outside of the plan. by keeping the insurance outside of the plan, they can have unfettered access to the increasing cash values prior to age 59 1/2.

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  • 2 weeks later...

Another advantage to keeping the life insurance outside of the plan is that benefits from life insurance are completely excludible from income if paid on account of death. Thus, the cash value (even to the extent created by earnings as opposed to original contributions) is excludible from income if the life insurance is purchased outside of the plan. By contrast, if the life insurance is purchased inside the plan, the cash value is all taxable.

Although this is balanced by complete deductibility of premiums (beyond the PS 58 cost) for life insurance purchased inside of the plan, you may well find that the imputed premiums if the life insurance is purchased outside of the plan are lower than the actual premiums. Just one more thing to add to the mix in considering whether it makes more sense to purchase life insurance inside of a plan or outside.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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  • 2 weeks later...

Though you may be able to purchase incidental life incsurance, this does not seem to obviate the need for an annuity contract or custodial account. It would seem, then, that you could purchase life insurance only if it were part of the annuity contract, held by the custodial account or meets the terms of reg 1.403(B)-1©(3) (which mandates that such life insurance policies contain certain annuity-like terms).

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