Retirement and cash accumulation of a life insurance policy (part 9)

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Although the cash accumulation of a life insurance policy is generally a little lower than that of an annuity, it will generally 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.

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Universal Life

In the event that life insurance policies are used to fund the retirement plan, a universal life product will probably be the most advantageous product to use. 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).

Treasury and IRS Shut Down Abusive Life Insurance Policies in Retirement Plans

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Although the general requirements for using life insurance to fund the qualified plan have been discussed, it is not enough to merely know about the use of “life insurance.” The policies offered by different companies, although similar in function, can have substantial differences in terms of mortality cost, current rates, methods of determining current rates, interest bonuses, and guaranteed rates to name a few. You should carefully consider several plans of insurance in several different scenarios before making any specific recommendations to your client.

Retirement Plan Investments FAQs

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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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10-Year Rule

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

Publication 525 (2017), Taxable and Nontaxable Income

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