Life Insurance Policies

In the event an employer wants to merge a prior plan that contained life insurance policies in the accounts of its participants into a successor plan that does not permit life insurance, what options does the client have in regards to those life policies?

1 hour ago, Logan401 said:

In the event an employer wants to merge a prior plan that contained life insurance policies in the accounts of its participants into a successor plan that does not permit life insurance, what options does the client have in regards to those life policies?

Life insurance is NOT a 411(d)6 protected benefit; it can be eliminated.

However, in this merge situation, they can also elect to keep the pre-existing insurance and just not allow any more purchases.

So the first thing to confirm is that there is no desire to keep the existing insurance in the merged plan.  Assuming that to be the case, then the contracts will be removed from the plan.

This can happen in several ways: First, the participants should be offered the option to BUY the insurance from the plan for the net cash surrender value.  If they can't afford that payment, then the policies can be first "maximum loaned" by the plan so that a big chunk of the cash value is moved out of the contract and into the investment fund. Now, the contract can be offered to the participant to buy for a much lower cost (the remaining cash value, most likely less than 10% of the total cash value prior to the loan).  Of course, the contract that is now transferred has the outstanding loan against it.  Lastly, if the participant doesn't want to continue the contracts outside of the plan, then they should just be surrendered.

Create a plan loan because of plan cash value life insurance?   Uggghh.

It's not a plan loan.  The loan is against the policy.  Example.  Participant has 250k total balance, of which 50k is the CSV of the insurance policy.  Say the max policy loan is 40k.  So, the policy proceeds of the loan go into the plan (40k), the participant contributes 10k and the policy is retitled out of the plan.  The participant still has a 250k balance.  He also has an insurance policy he privately owns that has 10k in CSV and an outstanding policy loan of 40k that the participant pays (outside of the plan with NQ money).  

Some people are uninsurable or hard to insure, so this is a way for them to keep protection they previously arranged for.

OK thanks for the clarification.  Been a long time since I've seen these types of things.

2 hours ago, K2 said:

It's not a plan loan.  The loan is against the policy.  Example.  Participant has 250k total balance, of which 50k is the CSV of the insurance policy.  Say the max policy loan is 40k.  So, the policy proceeds of the loan go into the plan (40k), the participant contributes 10k and the policy is retitled out of the plan.  The participant still has a 250k balance.  He also has an insurance policy he privately owns that has 10k in CSV and an outstanding policy loan of 40k that the participant pays (outside of the plan with NQ money).  

Some people are uninsurable or hard to insure, so this is a way for them to keep protection they previously arranged for.

K2: thanks for handling the explanation. Save me the effort. Take care.

Fair market value is not necessarily cash value. For a new or more recently issued policy, FMV is premium insurer charged, or would charge, for a new policy based on insured's attained age (and risk classification?). For an older policy, see Rev. Proc. 2005-25 Section, Section 3. Policy, subject or not to a policy loan that reduces its FMV, could be distributed to the participant if Plan permitted. Advantage: depending on type of policy, recovery of cumulative economic benefit value charges (aka "PS58 costs") as basis. Disadvantage: potential application of 10% premature distribution penalty on taxable balance of insurance specific distribution. Rev. Proc. 2005-25 applies very mechanical rules that do not reference the insured's risk classification. There being an increasingly prominent life settlement market where policy values are determined by current re-underwriting, and can substantially exceed the cash value (or in the case of settled term policies, the absence of cash value), has the RP become obsolete, or at least potentially questionable? A safe harbor is a safe harbor, but the RP does require its application to be reasonable.