Life insurance can often be purchased under favorable terms and conditions through a qualified pension or profit-sharing plan. The insurance is purchased and owned by the plan, using employer contributions to the plan as a source of funds. Understanding when to use them provides a great advantage in policy-making decisions.
- When a substantial number of employees covered under a qualified plan have an otherwise unmet life insurance need, either for family protection or estate liquidity.
- When there are gaps and limitations in other company plans providing death benefits, such as group term life insurance plans, nonqualified deferred compensation plans, and split dollar plans. Planners should consider using life insurance in a qualified plan to fill those gaps or supplement those plans.
- When a qualified plan for a closely held business or professional corporation is overfunded or close to the full funding limitation for regular trusteed plans, the addition of an incidental life insurance benefit, or a change to fully insured (Section 412(e)(3)—formerly 412(i)) funding, may permit future deductible contributions at a higher rate than before.
- When life insurance would be attractive to plan participants as an additional option for investing their plan accounts. This technique is most often used in a profit sharing or 401(k) plan but can be used in other types of defined contribution plans as well.
- When an employer wants an extremely secure funding vehicle for a plan, with guarantees as to future plan costs and benefits.
- Life insurance in a plan can provide funds to pay estate taxes, if any, thereby enhancing the ability of plan proceeds to provide financial security for the participant’s survivors.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM