* The life insurance company calculates the annual cost of insurance that must be included in the participant's taxable income.
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* The participant can borrow the cash value subject to Internal Revenue Service Code Sec. * If no longer needed, the life insurance cash value can be transferred to an annuity contract. * Premiums can be paid from previously accumulated contributions. * The participant may keep the policy after retirement (by paying income tax on the cash value). * The life insurance provides a self-completing financial and/or estate plan. * The life insurance is purchased with pretax dollars. But there are arguments in favor of such a purchase: There is no question that this sale earned the producer a nice commission. The result: Life insurance sales charges and other expenses eat up a lot of participant dollars, which otherwise could be growing toward a retirement nest egg. Now suppose a producer persuades the participant to use $49,000 to pay for a whole life insurance policy. In the case of universal life insurance, only 25% of the aggregate contributions can be used to purchase a policy.Ĭonsider, for example, that a tax-sheltered annuity participant has accumulated $100,000. A participant can use up to 50% of the aggregate contributions made to a 403(b) plan to purchase whole life insurance. The rules for selling life insurance inside a 403(b) plan are fairly loose. These plans are also known as tax-sheltered annuities, even though the term includes mutual funds and "incidental" life insurance. To understand why, a good starting place to look is 403(b) plans, which are tax-deferred retirement plans for employees of schools and other nonprofit organizations. Complaints have been filed and cases are pending. The plaintiffs' bar already has noticed that life insurance and annuities are being sold within qualified plans. The fact that this business is highly commission-driven draws the attention of regulators who are increasingly focused on market conduct. The truth is, commission payouts are life and annuity producers' bread and butter. Selling annuities is easier, but the temptation is there to sell high-commission life policies. Selling life insurance is a tough but financially rewarding job for the producers who master the art and climb to the top of their field. Some producers recommend paying life-insurance and annuity premiums with qualified-plan dollars, in part, because the plans are a ready source of otherwise scarce premium dollars. When asked why he targeted banks, bank robber Willie Sutton, as the legend goes, replied, "because that's where the money is." Miners headed to California in 1849 because they heard that gold was there. This leaves producers open to allegations that their sales pitches may be aimed more at fining their own wallets, rather than helping customers choose their best investment tool. Why put an accumulation vehicle that enjoys tax-deferred treatment inside a plan that, by definition, is tax deferred? Life insurance and annuities are relatively expensive, in part because the vast majority of them are sold by agents on commission. Paying life-insurance and annuity premiums with qualified-plan dollars is controversial. In these cases, premiums are paid with after-tax dollars, and the death benefit is income-tax free. Permanent (cash value) life insurance also can be used as an accumulation vehicle. Simply stated, a qualified plan is a tax-favored accumulation vehicle.
Participants pay income tax when they receive distributions from their plans. Earnings on these monies also are tax deferred. The money that employees authorize their employers to divert into these savings plans-called elective deferral contributions-are tax deferred. Employer contributions are deductible for the employer and tax deferred for employees, within certain limits. Qualified retirement plans are designed to encourage employees to save money now, so they will have enough to sustain them when they are no longer working. But there could be one looming-namely, the use of qualified retirement plan dollars to buy life insurance. After the rash of class-action lawsuits over sales of policies with so-called "vanishing premiums," the industry does not need another public-relations disaster. The life insurance industry has a long and mostly honorable tradition of serving the public, but the past 10 years have been challenging from a public-relations standpoint. Using qualified-plan dollars to buy life insurance and annuities is likely to create regulator and consumer backlash, once producers' true motivation is exposed. APA style: Another Market-Conduct Maelstrom Brewing.Another Market-Conduct Maelstrom Brewing." Retrieved from
#MAELSTROM BREWING FREE#
MLA style: "Another Market-Conduct Maelstrom Brewing." The Free Library.
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