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Project on Life Insurance

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					                                  Life Insurance
                                in a Qualified Plan
                                                             Jack Trapp, CLU, ChFC, CISP
                                                             General Director
                                                             Qualified Retirement Plans Group




For Agent Use Only. This material may not be used with the public.
This is for informational purposes only and is not intended as legal, tax or accounting advice. Please consult your professional adviser on such matters.
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MLINY0206077514 QRP-1145 01/2007
          Life Insurance in a QRP
   Defined Contribution
   Defined Benefit
   Tax-deductible life insurance
       Discounted dollars




                                    2 of 28
          Life Insurance in a QRP
   Finding the premium resource
       Business checkbook
   Three solutions for price of one
     Saving for retirement
     Need for life insurance

     QRP self-completion




                                       3 of 28
                                Life Insurance in a QRP
               Advantages
                   Allows premiums to be paid on tax-deductible basis
                   Provides immediate financial protection for
                    participant’s family in event of pre-retirement death
                   Death proceeds in excess of cash value are received
                    income tax-free to named beneficiary




Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for income tax purposes. There are few exceptions such as   4 of 28
when a life insurance policy has been transferred for valuable consideration.
              Death Proceeds
   Example
     $1,000,000    face amount
        $100,000   CSV
        $900,000   Income tax free
        $100,000   Taxable

     - IRA Rollover



                                     5 of 28
             Life Insurance in a QRP
   Advantages (cont.)
       Frees up personal dollars that would have been
        spent on premiums
          Buy/sell agreement
          LTC insurance

          Survivorship Life




                                                         6 of 28
             Life Insurance in a QRP
   Advantages (cont.)
       Policy may be distributed in-kind when participant
        terminates employment
          Absolute Assignment
          1099-R

          Equivalent CSV to make plan whole

          Policy Loan

       “412i Plans & Life Insurance” (QRP-1159)



                                                         7 of 28
             Life Insurance in a QRP
   Advantages (cont.)
       Seasoned assets in Profit Sharing Plan
          2-year
          5-year

     Survivorship Life
     Single Life




                                                 8 of 28
         Life Insurance in a QRP
   Provides a way to pay for personal life insurance
    needs with tax-deductible business dollars. Only
    PS-58 costs are taxable.
   For example, an owner in the 36% tax bracket
    can save $5,102 in taxes on a $400,000 policy
    with an $8,800 premium.




                                                  9 of 28
       Example
                                                                                                            Outside                                 Inside
          Insurance Premium paid from plan:                                                                         -                               8,800
          Profit transferred to owner:                                                                        14,069                                  -
          Employee Medicare Tax                                                                             (204.00)                                  -
          Federal Income tax (36%)                                                                        (5,065.00)                                  -


          Amount available to pay premium:                                                                     8,800                                8,800


          Tax on $464 PS-58 Cost (36%)                                                                              -                               167.00
          Total Taxes Paid:                                                                                 5,269.00                                167.00


          Total Tax Savings:                                                                                             *5,102.00




This is a supplemental illustration. Benefits and values are not guaranteed; the assumptions on which they are based are subject to change by the            10 of 28
insurer. Actual results may be more or less favorable.
              Incidental Tests
   Primary purpose of QRP: provide retirement
    benefit
   Only portion of QRP contribution can be
    funded by life insurance
   Remainder funded by annuities




                                             11 of 28
           Insurance in a Defined
             Contribution Plan
   Adds large pre-retirement income tax-free death
    benefit
   Will affect available lump sums since a portion
    of the fixed contribution is used for premium
    payments
   Does not increase or decrease the deductible
    plan contribution
   Is limited by the 25%/50% Rule and Profit
    Sharing 2 & 5-year Rules.

                                                12 of 28
           Incidental Test
Defined Contribution
 Life insurance premium
 50% of total contribution
 25% of total contribution




Defined Contribution
 Annual contribution         $10,000
 Whole life premium           $4,999
 Universal Life premium       $2,499

                                        13 of 28
Insurance in a Defined Benefit Plan
   Adds large pre-retirement income tax-free death
    benefit
   Does not increase or decrease benefit at
    retirement
   Increases the deductible plan contribution
   Is limited by the 100 times rule, 33 1/3% Rule
    and 66 2/3% Rule.


                                                14 of 28
                 Incidental Test
   Defined Benefit General Rule
      Life insurance face amount
      100 x projected monthly benefit




    Monthly benefit               $10,000
    Life insurance             $1,000,000
                                            15 of 28
                  Incidental Test
   Defined Benefit Alternative Rule
     Revenue Ruling 74-307
     Similar to Defined Contribution 25%/50% tests

     Based on life insurance premium
         66 2/3% of contribution (WL)
         33 1/3% of contribution (UL)




                                                      16 of 28
         Revenue Ruling 74-307
Example

   Annual Contribution      $100,000
   Whole Life Premium       $66,600
   Universal Life Premium   $33,300




                                        17 of 28
  412(i) Case Study
Insurance Funding Options
        AllAnnuity
        100 x life insurance
        30% life insurance
        60% life insurance



                                18 of 28
      412(i) Case Study – Insurance Funding Options*
                                                  Birth                                       Employment                       Actual
                 Sex                              Date                                           Date                       Compensation
                 M                             02/04/1953                                     01/01/1990                      225,000

                                   All Annuity                                                              100 x
                                                Insurance                                               Monthly Benefit
            Monthly Benefit Lump Sum Needed                                                                         Insurance
                                                                                                       Death                             Premium
            at Retirement     at Retirement (1)
                                                                                                      Benefit                            Allocation
               15,000            3,836,317
                                                                                                     1,500,000                            45,900


        Death                      Insurance Investment Fund
                                                                                                      Fund                               Total
        Benefit                    Premium      Allocation
                                                                                                    Allocation                        Contribution
            0                         0.00        324,897
                                                                                                     297,987                            343,887


T he data shown is taken from an illustration. It assumes a hypothetical interest crediting                                                       19 of 28
rate and may not be used to project or predict investment results                                    * Underwriting Assumptions: Standard Non-Tobacco
       412(i) Case Study – Insurance Funding Options*
                                                  Birth                                       Employment                              Actual
                 Sex                              Date                                           Date                              Compensation
                 M                             02/04/1953                                     01/01/1990                             225,000

                               30%                                                                                 60%
                            UL Premium                                                                         WL Premium
                        Insurance                                                                           Death Insurance Premium
                 Death           Premium
                                                                                                           Benefit          Allocation
                Benefit         Allocation
                                                                                                          6,370,523          194,938
               1,671,676          97,469

                                                                                                           Fund                                 Total
                Fund                                         Total
                                                                                                         Allocation                          Contribution
              Allocation                                  Contribution
                                                                                                          210,611                              405,549
               254,345                                      351,814


T he data shown is taken from an illustration. It assumes a hypothetical interest crediting                                                          20 of 28
rate and may not be used to project or predict investment results                                 * Underwriting Assumptions: Standard Non-Tobacco
                   PS-58 Cost
   Pension Series Letter #58
   Current economic benefit of life insurance
    coverage
   Includable as income
   Face amount – CSV x table/rates
   IRS Table or insurer’s 1-yr term rates
   IRS Form 1099-R

                                                 21 of 28
             IRS Notice 2002-8
   Valuing Economic Benefit
   After December 31, 2001:
     IRS Table 2001
     Insurer’s OYT Rates

   “Pending further guidance”




                                 22 of 28
             PS-58 Cost


   Policy Face Value      $100,000
   Cash surrender value   $30,000
   Amount at risk         $70,000
   Hancock OYT (age 45)   $.59 per $1000
   Reportable income      $41



                                       23 of 28
                    PS-58 Cost
   Cost recovery at distribution
     Table PS-58 recovered tax-free if policy is
      distributed to employee
     Policy surrendered to buy annuity – no recovery

     Contract annuitized – cost recovery

     Policy surrendered to pay benefit – no recovery




                                                        24 of 28
                   PS-58 Cost
   Self-employed individuals
     Sole proprietors
     10% owners of partnerships

   Cannot deduct cost of pure insurance
     Deduction is plan contribution minus PS-58 cost
     PS-58 not reportable as income
     No recovery as cost basis
     Tax impact – wash




                                                        25 of 28
                  PS-58 Cost
   Self employed example

    Plan contribution       $10,000
    PS-58 Cost                 $200
    Total deductible         $9,800

    1099-R income               $0

                                      26 of 28
         Forms and Procedures
   Commission Disclosure Statement, QRP-1011
   Request for Qualified Policies or Contracts,
    QRP-1060
   Request for Taxpayer Identification Number,
    IRS Form W-9




                                               27 of 28
                                                             Thank You




Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.) (not licensed in New York), John Hancock Variable Life Insurance Company (not licensed in
New York), John Hancock Life Insurance Company, Boston, MA 02116 and John Hancock Life Insurance Company of New York, Valhalla, NY 10595.

Guaranteed product features are dependent upon minimum premium requirements and the claims-paying ability of the issuer.
                                                                                                                                                          28 of 28
Qualified pension and profit sharing plans are administered by Berkshire Retirement Services, Pittsfield, MA 01201-8285.

				
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