Transferring Existing Policies Into a Qualified Plan

Life insurance owned by a business or plan participant can (with care) be transferred by contribution or sale into a qualified retirement plan. This will generally make premiums deductible and relieve the corporation or participant from the burden of paying those premiums.

Before any such transfer, planners should consider:

  • The insurance needs of the transferor – Perhaps the corporation that needs key employee coverage or the individual whose family needs coverage should not be assigning current coverage but should instead be encouraging the retirement plan to purchase additional coverage.
  • Prohibited transaction rules – Ensure that the contribution of a life insurance policy to a plan by an employer or by the individual participant satisfies the prohibited transaction exemption.
  • The taxation of life insurance proceeds from a qualified plan – Payments made from the plan to the employee’s beneficiary will not be totally income tax free (as they would have been had no transfer been made). Only the pure life insurance (i.e., the net amount at risk) will continue to be treated as life insurance. In other words, once an existing policy is transferred to the retirement plan, only the excess of the death benefit over the policy’s cash value at the time of the participant’s death will retain its income tax free status when paid out.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

Leave a Comment