subject: Life Insurance Purchased in Qualified Retirement Plans – A Look into How it Works [print this page] Life Insurance Purchased in Qualified Retirement Plans A Look into How it Works
While you may have the desire to take out a life insurance policy, the problem may be your inability to pay for the high premiums of the policy you want. If you are a business person looking for a way to save for retirement and find the funds required to purchase a life insurance policy, the ability to combine your Qualified Retirement Plan and your life insurance policy could be the answer. Qualified plans are typically intended for the sole purpose of accumulating money for retirement, but Qualified Retirement Plans can also allow for the purchase of life insurance.
The reason why combining the two is so beneficial is because you can use deductible employer contributions as the source of your premium payments. A plan trustee, usually the business owner, is the one who purchases and owns the policy for the participant. This is a highly effective way to fund premium payments for your life insurance policy. When you choose to combine your Qualified Retirement Plan and your life insurance into one, your premiums can become tax-deductible, a fact that does not exist if you pay for life insurance independently. It also adds a self-completion feature to your plan. Plus, if you take out a whole life insurance policy, the accumulated cash value is guaranteed at retirement.
Qualified Retirement Plans are obviously designed primarily with retirement benefits in mind. Since this is the case, the amount of the life insurance that is incorporated into the plan must qualify based on "incidental" tests forbidden by the IRS. For example, only part of the annual contributions to the plan can be put toward life insurance premiums. The rest must be a deposit into an annuities fund or other similar side fund. Both Defined Benefit and Defined Contribution plans are subject to the IRS's incidental tests.
As the participant in the plan, death benefits will be distributed to your beneficiaries in the event of your death. This entire amount is income tax-free, assuming the PS-58 costs have been paid yearly. This amount is relatively small. For example, if the face value of the policy is $1,000,000, the PS-58 cost may be $5,000 per year. This is the portion of taxable income that is paid each year because life insurance coverage offers economic benefits to the insured. If you are looking for an easier way to save for retirement and plan for the future of your beneficiaries simultaneously, this could be perfect for you.
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