Advanced Underwriting Consultants

Question of the Day – September 13

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client wants his pension plan to buy insurance on his life.  Can he sell the pension plan an existing policy?

Answer:  No.

The Tax Code has very specific rules on pension ownership of life insurance.  Certain kinds of qualified plans are only allowed to allocate pension money to life insurance if they provide an incidental benefit to the plan.  Other plan rules are more liberal in allowing life insurance ownership by the pension plan.

The advantage to the plan participant in having life insurance owned by the plan is that the money used to pay the life insurance premium is before tax, making pension ownership of life insurance one of the few ways that a participant can arguably pay for life insurance premiums with pre-tax money.

The IRS is not the only government entity that regulates how pension plans must work.  The Department of Labor also is involved.

Financial transactions between a pension plan and a participant are generally not permitted, even if they are negotiated at arm’s length.  The Department of Labor has created some special exceptions concerning life insurance.  They do allow the pension plan to sell a pension-owned life insurance policy to the insured plan participant, a participant’s family member or an ILIT.

However, there are no special exceptions that allow a plan participant to sell a personally owned life policy to the plan.  Therefore, such sales are prohibited transactions and not allowed.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.