There is a rule that limits your contributions to life insurance
inside qualified plans. Life insurance can only be offered in a QP if
it is considered an "incidental" benefit. Essentially, the plan's
purpose cannot be to solely provide insurance coverage.

Variable Universal Life and Universal Life contributions are limited
to 25% of your annual contributions. You can choose to allocate up to
50% of your contribution to Whole Life, if you wish. There are some
exceptions to these limits if you have "seasoned" money in the plan
already. This means that if you have contributions inside the plan
that are older than 5 years, they are exempt from these limits. You
could reposition these assets into the insurance at any time without
restriction.

Wooglin



shempmcgurk[at]netscape.net (Shemp McGurk) wrote in message news:<a2578468.0310080719.7719d8ed[at]posting.google.com> ...
- quote -

Frank:

This strategy takes advantage of a current law that values insurance
policies on their cash surrender value, not their actual value. So,
if you purchase a life insurance policy inside a qualified plan, and
you take the policy through a distribution, the taxable distribution
to you would be at the cash surrender value, even though the policy
may have more actual cash value.

The IRS sees this as a tax-abusive strategy. Currently the IRS is
weeks away from releasing new regulations that will change the tax
treatment of life insurance distributions from qualified plans. It is
the insurance world's opinion that this loophole will be closed and
previous plans will not be grandfathered.

Essentially, they will blow up this tax loophole. It is a bad idea.

I have seen this done, but only with policies with a life of longer
than 5 years.....I believe the financial planner is seriously
misleading you if he/she is proposing you take the policy as a
distribution in only one year.


Wooglin





franksplace2[at]email.com (FranksPlace2) wrote in message news:<d6bbed5b.0310090847.9457685[at]posting.google.com> ...
- quote -

A "Financial Planner" (read insurance salesman) tried to pursuade me
to put all my 401k money into a VL insurance product and then after a
year withdraw the money, paying tax only on the reduced cash value.
Subsequently the cash value grows back to the original value and I
cash in the insurance policy tax free.

This is a little too risky for me.

Frank


ttroberts[at]aol.com (TTRoberts) wrote in message news:<20031008130652.13226.00000283[at]mb-m24.aol.com> ...
- quote -

shempmcgurk[at]netscape.net (Shemp McGurk), you asked:

<< <I> I understand that one cannot buy life insurance within an IRA but can
within a 401(k)...is that correct? </I> >
This is correct.

<< <I> How is it done? </I> >
If the life insurance is one of the choices, you simply choose it as you would
any of the other options to use the money within.

<< <I> Does that particular 401(k) plan have to allow it or can it be done
within any 401(k)? </I> >
Any 401(k) plan can set it up to make life insurance available. Many plan
administrators not know that this is possible.

<< <I> What are the tax implications and how are taxes determined when
premiums are paid with 401(k) funds? </I> >
Your total 401(k) contributions allowable include any that you may use for life
insurance premiums. Premium would be tax deductible just as any other 401(k)
contribution. Just as the general rule of thumb suggests that when premiums
are deductible, the benefit becomes taxable. So, in a 401(k) the death
benefit of any life insurance policy would effectively stay within the 401(k)
and be taxable when withdrawn. The same would be true for the policy's cash
value - when withdrawn from the 401(k) it would become taxable.

<< <I> Who owns the plan...the 401(k) or the individual? </I> >
Just like the rest of the money in a 401(k), the policy belongs to the
employee.

<< <I> If the 401(k) owner pays for insurance premiums before age 59 1/2, are
there 10% penalty charges for early withdrawals? If so, is there an
exception that can be set up to avoid the penalty? </I> >
"Payment" of the premiums is not a factor. Any "withdrawals" from the 401(k),
whether it's cash from the investments or cash from a life insurance policy,
it's subject to the same rules.

The basic premise for having life insurance within a plan like a 401(k) is to
guarantee a certain amount will be achieved with the qualified plan if the
employee dies. But, as you can see, though you can deduct life insurance
premiums this way, it has a negative side to it where the death benefit now
become taxable - where by owning life insurance outside of a qualified plan,
the death benefit is income tax free.

However, there could be some advantages in that if you've had the policy in a
qualified plan for a number of years, you're paying for the insurance on a
pre-tax basis. And if the policy has not built up very much cash value, then
there may be little income tax to pay when the policy is pulled out (timing of
this can play an important role). Once you've paid the income tax on the
policy's cash value, the policy can then be continued and the cash value grow
as any other policy would if it had not been in a qualified plan. And in such a
case, might be some advantage as to how the internal COI (cost of insurance) is
paid and how large it is.
...

I understand that one cannot buy life insurance within an IRA but can
within a 401(k)...is that correct?

How is it done?

Does that particular 401(k) plan have to allow it or can it be done
within any 401(k)?

What are the tax implications and how are taxes determined when
premiums are paid with 401(k) funds?

Who owns the plan...the 401(k) or the individual?

If the 401(k) owner pays for insurance premiums before age 59 1/2, are
there 10% penalty charges for early withdrawals? If so, is there an
exception that can be set up to avoid the penalty?

Thanks in advance for your answers to these questions...