Although the cash accumulation of a life insurance policy is generally lower than that of an annuity, it will typically surpass most CDs and carries no more risk than an annuity. The advantage of having the death benefit provided under the same policy that will provide the retirement benefits may be sufficient inducement for an employer to opt for the slightly lower net yield.
If you plan to use life insurance policies to finance your retirement, consider opting for a universal life product. In addition, universal life insurance would be the product of choice in the profit-sharing plan since the premiums are entirely flexible (i.e., in a year with low profits, you don’t have to worry a great deal about lapsed policies or forced contributions in excess of profits to keep the policies in force).
Simply knowing about “life insurance” is insufficient to meet the requirements for using it to fund a qualified plan. While there has been discussion about the general situation, further understanding is necessary. The policies offered by different companies, although similar in function, can have substantial differences in mortality cost, current rates, methods of determining current rates, interest bonuses, and guaranteed rates. You should carefully consider several insurance plans in different scenarios before making specific recommendations to your client.
Plan Terminations & Corporate Liquidations
A qualified plan must be intended as permanent. If a plan is terminated within a few years of its inception for other than a valid business reason, the plan may be subject to retroactive disqualification with the resultant loss of all corporate deductions. For this reason, if a plan termination is contemplated, a favorable determination should be applied for and received from the IRS prior to any such termination. This permanency requirement does not impede the employer’s customarily retained right to unilaterally terminate the plan or cease contributions. The termination of a plan requires that all participants be fully vested in their accrued benefits or account balances. ERISA may require specific allocations to be made upon the termination of a defined benefit plan.
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A consequence of the termination of a profit-sharing plan because of the cessation of contributions is the immediate and full vesting of the account balances. After the plan has been in existence for ten years, it may be discontinued without the necessity of the employer showing a valid business reason. The complete liquidation of an employer would ordinarily be sufficient grounds for the termination of the plan and trust, thereby avoiding the tax penalties. 7-36
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