Why Have Life Insurance in a Qualified Plan? BROOKFIELD INSURANCE PARTNERS PO Box 417 Brookfield, MA 01506 Office: (866) 6...
Why Have Life Insurance in a Qualified Plan? <ul><li>Client Profile: </li></ul><ul><li>Purchasing Life Insurance in a Qual...
Why Have Life Insurance in a Qualified Plan? <ul><li>Premiums are Tax-Deductible:  </li></ul><ul><li>All plan contribution...
Why Have Life Insurance in a Qualified Plan? <ul><li>Why Have Life Insurance in a Qualified Plan? </li></ul><ul><li>Policy...
Why Have Life Insurance in a Qualified Plan? <ul><li>Asset Protection:   </li></ul><ul><li>The assets in an ERISA plan are...
Why Have Life Insurance in a Qualified Plan? <ul><li>Qualified Plan Exit Strategies </li></ul><ul><li>What happens if you ...
Why Have Life Insurance in a Qualified Plan? <ul><li>Qualified Plan Exit Strategies (cont’d) </li></ul><ul><li>●   Transfe...
Why Have Life Insurance in a Qualified Plan? <ul><li>When purchasing life insurance in a qualified plan there are several ...
Why Have Life Insurance in a Qualified Plan? <ul><li>If you or someone you know is in this </li></ul><ul><li>situation, pl...
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Why Have Life Insurance In A Qualified Plan

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Why Have Life Insurance In A Qualified Plan

  1. 1. Why Have Life Insurance in a Qualified Plan? BROOKFIELD INSURANCE PARTNERS PO Box 417 Brookfield, MA 01506 Office: (866) 639-0443 [email_address] www.brookfieldpartners.com
  2. 2. Why Have Life Insurance in a Qualified Plan? <ul><li>Client Profile: </li></ul><ul><li>Purchasing Life Insurance in a Qualified Plan can benefit not only C-Corp. </li></ul><ul><li>owner/employees, but also owner/employees of pass through entity S- </li></ul><ul><li>Corp., LLCs, and Partnerships. </li></ul><ul><li>Business owners: </li></ul><ul><li>Interested in additional tax deductions </li></ul><ul><li>Is interested in income protection, wealth transfer planning, business and estate planning, and qualified plan preservation. </li></ul><ul><li>Looking to provide significant life insurance protection for with very little impact on current cash flow. </li></ul><ul><li>Looking for a tax-deductible option for Buy/Sell Funding </li></ul><ul><li>Looking for tax-deductible funding for Key Person life protection </li></ul>
  3. 3. Why Have Life Insurance in a Qualified Plan? <ul><li>Premiums are Tax-Deductible: </li></ul><ul><li>All plan contributions, including the portion allocated to life insurance </li></ul><ul><li>premiums, are income tax deductible. </li></ul><ul><li>Example: </li></ul><ul><li>Assume a client resides in a state where the combined federal and state </li></ul><ul><li>income tax is 40% and the life insurance premium is $100,000. </li></ul><ul><li>Owning the life insurance outside the pension plan </li></ul><ul><li>One must earn this amount: $166,667 </li></ul><ul><li>Pay tax at 40%: (66,667) </li></ul><ul><li>Amount Remaining to Pay Premium: $100,000 </li></ul><ul><li>Owning the life insurance inside the pension plan </li></ul><ul><li>Premium payment: $100,000 </li></ul><ul><li>Tax Savings (Deduction): (40,000) </li></ul><ul><li>Net Cost: $60,000 </li></ul><ul><li>$60,000/166,667 = 35.9% </li></ul><ul><li>It costs about one-third the amount to buy the policy INSIDE the pension </li></ul><ul><li>plan or $106,667 less than the cost to own it outside the plan when you take </li></ul><ul><li>in consideration the tax aspects!! </li></ul><ul><li>Your client probably has better things to do with the $106,667, </li></ul><ul><li>don’t you think? </li></ul>
  4. 4. Why Have Life Insurance in a Qualified Plan? <ul><li>Why Have Life Insurance in a Qualified Plan? </li></ul><ul><li>Policy Proceeds Pass Income Tax-Free to the Beneficiary: </li></ul><ul><li>Life insurance proceeds pass to the beneficiary income tax-free to the </li></ul><ul><li>extent they exceed the policy’s cash surrender value (IRC 101). </li></ul><ul><li>Policy Proceeds Pass Estate Tax-Free when Paid to the Spouse: </li></ul><ul><li>Since ERTA ’80 no estate tax is due when paid to a spouse due to the </li></ul><ul><li>unlimited marital deduction. </li></ul><ul><li>Plan Self-Completing: </li></ul><ul><li>If one dies before retirement, the life insurance policy will provide all, or </li></ul><ul><li>substantially all, the monies that would have been available at retirement. </li></ul><ul><li>Ratings are Deductible: </li></ul><ul><li>The ratings applied, if any, become tax-deductible as a normal part of the </li></ul><ul><li>premium. </li></ul><ul><li>Larger Deduction: </li></ul><ul><li>The life insurance is an ancillary, or extra benefit, and has the effect of </li></ul><ul><li>creating additional tax-deductible contributions. Your client has a life </li></ul><ul><li>insurance policy, why not add it to the plan and create an additional </li></ul><ul><li>deduction? </li></ul>
  5. 5. Why Have Life Insurance in a Qualified Plan? <ul><li>Asset Protection: </li></ul><ul><li>The assets in an ERISA plan are protected from the claims of judgment </li></ul><ul><li>creditors. This extends to the life insurance policy. </li></ul><ul><li>Reduces Personal Expenses: </li></ul><ul><li>The pension plan pays the premium, the participant saves the expense, as it </li></ul><ul><li>relieves them from the burden of purchasing personal insurance coverage. </li></ul><ul><li>Lapse Avoidance: </li></ul><ul><li>The plan assets and contributions are used to pay the premium. </li></ul><ul><li>Fringe Benefit: </li></ul><ul><li>Employee participants actually get two benefits: the retirement benefit and </li></ul><ul><li>the life insurance benefit. </li></ul><ul><li>Affordability after Retirement: </li></ul><ul><li>The participant can take the policy with them at retirement. This policy, </li></ul><ul><li>having been issued at a younger age, will have a lower cost than a currently </li></ul><ul><li>issued policy. The rate classification at issue will be preserved allowing the </li></ul><ul><li>policy to be maintained at more favorable prices if the participant has since </li></ul><ul><li>suffered a health decline. </li></ul>
  6. 6. Why Have Life Insurance in a Qualified Plan? <ul><li>Qualified Plan Exit Strategies </li></ul><ul><li>What happens if you need to remove the life insurance from the plan? </li></ul><ul><li>There are several options: </li></ul><ul><li>● Take a Taxable Distribution </li></ul><ul><li>The life insurance policy is distributed to the participant (you) directly </li></ul><ul><li>from the pension plan and you continue to maintain the policy on a non- </li></ul><ul><li>qualified basis. At the time of the distribution, income tax is due on the </li></ul><ul><li>fair market value of the policy less the accumulated one year term costs. </li></ul><ul><li>● Purchase the Policy </li></ul><ul><li>The life insurance policy is purchased for its fair market value. The assets </li></ul><ul><li>of the plan are not depleted; the insurance is maintained outside of the </li></ul><ul><li>plan unchanged. This purchase is not a taxable event. </li></ul><ul><li>● Exchange the Policy </li></ul><ul><li>Several carriers have an exchange option feature allowing the policy </li></ul><ul><li>inside the plan to be exchanged for a new policy outside the plan. Your </li></ul><ul><li>insurability will remain the same as that of the pension policy, regardless </li></ul><ul><li>of your current health. </li></ul>
  7. 7. Why Have Life Insurance in a Qualified Plan? <ul><li>Qualified Plan Exit Strategies (cont’d) </li></ul><ul><li>● Transfer to Insurance Trust (ILIT) </li></ul><ul><li>An irrevocable life insurance trust is created. The trust purchases the </li></ul><ul><li>policy from the pension plan. The dollars used to purchase the policy roll </li></ul><ul><li>over to your IRA while the policy itself transfers to the insurance trust. </li></ul><ul><li>Properly structured, the policy proceeds will be income and estate </li></ul><ul><li>tax-free. </li></ul><ul><li>● Surrender the Policy </li></ul><ul><li>If you no longer need or desire life insurance protection, you may </li></ul><ul><li>surrender the life insurance contract and retain the cash surrender values </li></ul><ul><li>inside your retirement account. </li></ul>
  8. 8. Why Have Life Insurance in a Qualified Plan? <ul><li>When purchasing life insurance in a qualified plan there are several risks and limitations that should be carefully considered. </li></ul><ul><li>There are no additional tax deferral benefits from purchasing a life insurance policy through a qualified plan. Your clients should only consider buying a life insurance policy if it makes sense because of the policy's death benefit protection, which may not be completely income tax free. </li></ul><ul><li>Life insurance must be distributed from a qualified plan if the participant's employment terminates. An IRA rollover will not be available for that portion of a qualified plan that represents life insurance because life insurance is not a permissible investment within an IRA. </li></ul><ul><li>When life insurance is purchased within a qualified plan, the amount that the beneficiary receives income tax free is the difference between the face amount and the cash surrender value, but only to the extent that the participant has properly recognized into income the appropriate amount of economic benefit. </li></ul><ul><li>The plan participant of a qualified plan must recognize the economic benefit of the insurance protection as income each year. The amount of economic benefit is measured by an IRS Table (currently Table 2001) or by a one-year term product of the insurer that meets specific IRS parameters outlined in IRS Notice 2002-8. </li></ul><ul><li>The mix of life insurance versus other investments is subject to the so called &quot;incidental benefit rules&quot;. The death benefit (the life insurance component) should be incidental to the purpose of providing retirement benefits. Generally, if the life insurance premium is less than 50% (25% for variable or universal life) of the overall contribution, this test is satisfied. </li></ul><ul><li>In April 2005, the Treasury Department and the IRS issued Rev. Proc. 2005-25 which discusses the valuation of life insurance policies within the context of qualified plans and Sections 83 and 79 of the Internal Revenue Code. In August of 2005, the Treasury Department issued final regulations clarifying that a life insurance policy transferred out of a qualified plan must be taxed at its full fair market value. The preamble to the final regulations states that taxpayers may rely on the safe harbor method for computing full fair market value discussed in Rev. Proc. 2005-25. </li></ul><ul><li>The death benefit may be included in your clients' estate for Federal estate tax purposes. </li></ul><ul><li>Life insurance policies contain fees and expenses, including cost of insurance, administrative fees and premium loads, surrender charges and other charges or fees that will impact policy values. Variable universal life insurance policies also have additional charges and fund operating expenses. </li></ul><ul><li>Both the investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. </li></ul><ul><li>Under Section 101(j) of the Internal Revenue Code, the death benefit of an employer owned life insurance contract may not be completely federal income tax-free if certain notice and consent rules and other requirements are not fulfilled. In addition, death proceeds may be included in your estate for estate tax purposes. Clients should consult his/her tax advisor. </li></ul><ul><li>This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice. </li></ul>
  9. 9. Why Have Life Insurance in a Qualified Plan? <ul><li>If you or someone you know is in this </li></ul><ul><li>situation, please contact us for illustrations, </li></ul><ul><li>and implementation support: </li></ul><ul><li>Bradford J. Kadelski </li></ul><ul><li>President Brookfield Insurance Partners </li></ul><ul><li>PO Box 417 </li></ul><ul><li>Brookfield, MA 01506 </li></ul><ul><li>[email_address] </li></ul>

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