RMD based on Life Insurance in 401(k) Plan

When calculating the Age 70.5 Required Minimum Distribution on a participant account holding a life insurance policy, regarding the life insurance policy, does the RMD calculation include the value of the death benefit, does it use the cash value for the calculation, or does it include both?

Neither, unless by "value of the death benefit" you mean fair market value of the policy. If so, Yes, No, No.

Mike,

Gotcha. I include Fair Market Value in the RMD calculation.

I receive a year end report from the life insurance company that shows: Face, Premium and Mode, Dividend, PS-58 Cost, Total Death Benefit, and Current Cash Value. I would assume Fair Market Value and Total Death Benefit are the same thing. It (Total Death Benefit) is greater than Face Value and less than Current Cash Value. I will query the life insurance agent servicing the plan.

Thank you.

Not sure how the total death benefit can ever be less than the current cash value unless there are some loans shown against the total death benefit but not the current cash value.  I'd expect the FMV to be closer to the cash value provided there are no inflated surrender charges.  See Rev Proc 2005-25 for guidance.

rp05-25.pdf

13 hours ago, AJC said:

Mike,

Gotcha. I include Fair Market Value in the RMD calculation.

I receive a year end report from the life insurance company that shows: Face, Premium and Mode, Dividend, PS-58 Cost, Total Death Benefit, and Current Cash Value. I would assume Fair Market Value and Total Death Benefit are the same thing. It (Total Death Benefit) is greater than Face Value and less than Current Cash Value. I will query the life insurance agent servicing the plan.

Thank you.

Total death benefit and fair market value are definitely NOT the same thing.  Death benefit includes the net amount at risk (the real insurance amount at this time).  If you surrendered the contract, you give up the net amount at risk.  Also, your statement of TDB being greater than face value (logical) but LESS than current cash value is not logical.  That means that upon death, the payout would be LESS than the current surrender value (assuming no surrender penalty, but even worse if there is a penalty).  Did you misstate or misread that?

Oops! Misstated my earlier response.

Should have said, the statement I have shows the Total Death Benefit is greater than Face Value and less than the combined Face Value Plus Current Cash Value.

That makes more sense, and it's not surprising that the Total Death Benefit is less than the Face Amount plus Cash Value.  Depending on how the policy is structured, they could be equal.  I'd still expect the FMV to be close to the Cash Value of the policy, all things being equal, and assuming no monkey business on policy structure. That's what the insurance company would redeem the policy for. 

Dear AJC - With your question you have entered the Twilight Zone. Assuming this is not a new policy (purchased within a year of the applicable RMD year-end) or a paid-up policy (which differs from a policy that is merely self supporting), and depending on the purpose of the valuation, there are guidelines, some safe harbors, and a lot of facts and circumstances wiggle room. Thank goodness IRAs are not permitted to own life insurance and relatively few qualified plans accommodate it. For RMD purposes we generally look to Rev Proc 2005-25. But one of the more comprehensive overviews of the subject can be found at <https://theasagroup.com/wp-content/uploads/JHancock-Valuation-of-Life-Insurance-Policies.pdf>.  Good luck.