How to Use Life Insurance in Qualified Plans

Example. Your client is the sole shareholder and president of a cash-rich, highly profitable closely held corporation that employs ten other individuals. The business has set up a qualified pension and a qualified profit sharing plan. The client is highly rated for insurance purposes and his attorney has suggested he increase his estate liquidity by purchasing at least $1,000,000 of additional life insurance. Although your client has a salary of $400,000 a year from the business, his standard of living is exceptionally high and he has six children, all in Ivy League colleges or graduate schools which leaves him with little spendable income.

Instead of purchasing the high premium life insurance with personal, after-tax dollars (of which he has little), he has both the pension and profit sharing plan amended to allow the purchase of life insurance on the lives of plan participants. The trustees then purchase life insurance on his life equal to the maximum amount allowable under current pension law and the client’s irrevocable trust set up for his wife and children purchases the balance of the $1,000,000 his attorney suggested.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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