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  • Barry Boscoe

Tax-Deductible Life Insurance and Qualified Plans

Why would anyone purchase insurance in Qualified retirement plan? This seems counter intuitive as a retirement plan is for investment purposes. Having said that life insurance as an investment option will provide some unique benefits that cannot be gotten elsewhere.

One of the biggest advantages of owning insurance in a qualified plan is that all contributions will be tax deductible. This means the premium payments for the life insurance will be a deductible expense to the business entity sponsoring the qualified plan.

Ratings due to ill health or age are deductible and amortized by the plan on a pre-tax basis. This is a significant financial and cost-effective advantage for someone who ordinarily pays higher premiums with after tax dollars.

Funding the qualified plan with life insurance can be accomplished by:

1) Selling an existing in force life insurance policy to the qualified plan.

2) Seasoned Money rules allow for use of up to 100% of the Qualified Plan assets to be used to acquire life insurance if desired.

Plan Sponsors and Participants may purchase a survivorship policy within a profit-sharing plan. This can be particularly valuable facilitating transfer of Intergenerational Wealth when combined with a GST or Generation Skipping Transfer Trust.

Another benefit of life insurance in a qualified plan is it may increase the overall tax deductions to the sponsoring company.

There is an economic benefit “Reportable Economic Benefit” to having insurance owned and purchased by a qualified plan. This economic benefit is a very small tax to pay paid by the participant which makes the Pure Death Benefit Income Tax-Free.

Funding a buy sell agreement may be done using insurance inside a profit-sharing plan. The participant in a profit-sharing plan can, in limited circumstances, have the plan purchase life insurance on the life of another, a spouse, or a business partner. In purchasing it on the business partner the insurance death benefits can be coordinated with the Buy-Sell Arrangement and used to fund the buy sell agreement. “Tax-Deductible Buy-Sell Agreement”.

At some point in the future, you, or an Irrevocable Trust outside of your estate will want to purchase the life insurance policy from the qualified plan. The IRS has laid out a Revenue Procedure 2005-25 Also knows as “Safe Harbor Rules” as well as a Third-Party Valuation to purchase the policy for the fair market value. The Policy is often valued at a deep discount to what was invested in terms of total premiums. The “Asset Sale” can be made directly to an insurance trust which “eliminates” future estate taxes, providing asset protection, creditor, predator, and divorce protection.

Qualified plans optionally offer life insurance as an alternative asset or investment option along with a way to provide death benefits that are tax deductible, providing income tax free value when the death benefit is greater than the cash surrender value or after the policy is sold to an Irrevocable or Generation Skipping Trust.

Naturally there are some potential drawbacks that need to be considered.

They are:

1) The reportable economic benefit cost. (Cost effective until age 85)

2) The actual “cost of insurance” is an expense” against the cash accumulation.

3) The estate tax inclusion of the life insurance death benefit whilst in the plan

Despite these potential drawbacks there are significant and distinct advantages and planning opportunities with life insurance in qualified plans.

Please contact me If you would like to learn more about the unique advantages & benefits of customizing & using your qualified plan to acquire life insurance on a pre-tax and tax-deductible basis.

Office: 818-342-9950.

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