Thanks for the help

Looks like that 25% number is correct. The death benefit is not taxable
if paid before retirement. Thinking through the implications of what
happens when he retires -- he can continue keep the plan in force as
long as he wants since he's self-employed. But if he no longer has
earned income to fund the policy, it'll probably cancel on it's own due
to lack of premiums paid.

http://smallbusinessreview.com/for_t...1k/index1.html


kastnna wrote:
- quote -

Agreed. However, I probably should have better framed the situation.

The client also has over $1MM in VA's and a couple $$$million in other
brokerage accounts. In other words, he feels financially secure in his
future/retirement and is no longer saving. Judging by his lifestyle, he
is in the "consumption mode", not the "saving mode".

The policy is not a cash building policy/investment. He bought it for
the death benefit. The only reason the 401(k) is involved is so that he
can pay premiums with pre-tax dollars. My concerns are with the
structure of his homemade tax shelter. Particularly the taxability of
the death benefit and the use of 100% of annual contributions to pay a
whole life premium.

On a side note, a life insurance policy would be a wonderful investment
in a 401(k) (as opposed to more traditional investments) IF AND ONLY IF
he is investing for the benefit of his beneficiaries, not himself, AND
he dies before the numerous future premiums deplete the investment
return on the policy. It all depends on perspective. Similarly
annuities MAY be suitable for a tax qualified account if the benefits
of secondary guarantees outweigh the benefits of potential growth. You
are correct that this is not ordinarily the case.

Thanks for the reponses.

Some basics -- assume the purpose of this policy is for investment
purposes. Life insurance lets underlying investments grow tax deferred.
401K lets underlying investments grow tax deferred. Basically, it's
redundant to put insurance/annuities inside 401Ks and other retirement
vehicles -- you are wasting possible tax deferred dollars every year.
If retirement is coming up fast, the 15K/44K a year limit can be
restricting. So in theory, a highly paid professional first should max
out their 401K with the standard investment fare (mutual funds, etc).
Then get an insurance policy and max out premiums to the 7-pay limit
defined by the IRS to put more towards cash value versus cost of
insurance+commissions.

For this specific case, we need more info. What's his age and health?
How long as this plan been in place? Does he need insurance more than a
tax shelter? Could he qualify for a new policy right now (e.g. cancel
-- move outside the 401K, get different plan, etc)? My first thought
was if this plan has been in place for more than a few months ... ouch.
As a reference point, I fund my 500M policy at the 7-pay limit -- $57
for insurance, $40 for commissions, $1424 for cash value per month.


kastnna wrote:
- quote -

A friend/client and I were recently discussing his 401(k)-PSP, and like
many clients I meet, he could hardly explain to me what he had or why
he had it.

- quote -

(not the PSP). The annual premium on the policy is $20K. The 401(k)
only has about $40K in investable funds in the plan other than the
insurance cash value (which is only $8K). The guy is a self employed
lawyer that makes about 400K AGI.

I have read from a couple of sources that only 25% of the plans assets
can go towards a life insurance premium. Is this accurate and if so,
could someone please point me towards the IRS code? I didn't find
anything in publication 560. Also, because the premiums are paid
pre-tax, does this affect the tax status of the death benefit payout to
his family?

I am new to the insurance business and have not encountered this
situation before. If my friend has a genuine problem I need to be able
to refer him to a local CPA and/or CFP. However, I do not want to
unneccesarily(sp?) alarm him.

Thanks in advance