Life Insurance in Pension Plans Q & A

Life Insurance in Pension Plans QandA
by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

Life Insurance in a Pension Plan

Q. Are unisex rates required when life insurance is bought in a pension plan?

  1. Yes, these are required. Unisex rates are the same rates for men and women.

Q. Should I ask for an estimate of the economic benefit I will have to realize each year as taxable income? And is this benefit based on the insurance company’s rates or the Table 2001 rates?

  1. Yes. You will want an estimate of your annual taxable income for tax planning purposes.The rate determines how much taxable income you are supposed to realize on your tax return each year. The rate is charged on the net amount at risk, which is the death benefit less the cash surrender value. This allows the net amount at risk to be tax-free.

You will need to inquire with the insurance company to identify whether the company has term rates acceptable for use in lieu of Table 2001 rates.

Q. How do I get the life insurance policy out of the pension plan if the plan is terminated? What are my options and what are the costs and tax consequences?

  1. If your pension plan is terminated, you can’t roll the life insurance into an IRA. Instead, your options are as follows:
  • Surrender the policy with no tax consequence.
  • Distribute the policy. Here, you will pay tax on the difference between the value of the policy and the cumulative amount of economic benefit you’ve recorded on your tax returns. If before age 59½, you could face pre-retirement penalties.
  • Buy the policy from the plan for its current value. There are specific rules governing who can acquire the policy.
  • Talk to your tax advisor for more details because determining the value of a life insurance policy taken out of a pension plan can be complicated.

CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.