Complete Pension Plans With Life Insurance
A number of recent corporate bankruptcies have focused attention on the advisability of over-weighting a participant's pension plan account with investments in the stock of the very employer that sponsors the pension plan. Enron employees and their beneficiaries lost millions of dollars in pension plan benefits when their corporation's stock vaporized over a period of months.
Although pension plan participants cannot escape the volatility of the equity markets, the disastrous effects of the Enron debacle might have been mitigated through greater diversification of the retirement plan's assets. An increasingly popular means of achieving that goal–plus providing additional benefits–is through the purchase of variable universal life insurance policies for employer-sponsored pension plans.
The purchase of variable universal life insurance can not only achieve greater diversification of retirement plan assets, it can also significantly enhance the retirement plan's survivor benefits, adding a self-completing component to the plan.
A pension plan's contribution to a variable universal life insurance plan prohibits the possibility of over concentrating plan assets in the sponsoring employer's stock. Variable universal life's segregated equity accounts are by nature diversified. That spreads the plan participant's risk across a broader spectrum of stocks, bonds or a combination of both, minimizing and reducing the loss exposure in a market downturn.
An even greater value of an insured pension plan is the tremendous magnification and conversion that occurs when an employer's tax deductible plan contribution is allocated to a life insurance premium. That premium purchases the protection of a tax-free survivor benefit that can multiply the value of an employee's retirement assets for his or her family. Insured survivor death benefits are insulated from the volatility of the marketplace that affects all equity account investments.
Insured pension plans are often referred to as "complete" plans for the following reasons:
(1) Life insurance can enhance survivor benefits throughout the employee's pre-retirement years in the event of his or her death. The plan beneficiary could receive a potential multi-thousand dollar tax-free insurance benefit in lieu of a potential depreciated and taxable equity account value.
(2) The net amount at risk of a pension plan's life insurance death benefit is received income-tax-free by the plan beneficiary. All other pension plan assets are subject to ordinary income taxation.
(3) Life insurance adds a self-completion feature to pension planning objectives. The pension plan instantly matures at the death of the plan participant, whenever that might occur.
(4) Life insurance can provide a measure of guaranteed death benefits as long as the policy premiums are paid.
(5) Only life insurance provides for an optional settlement payment of a guaranteed life annuity to the plan participant's designated beneficiary. The beneficiary can convert pension plan death benefits from a lump sum payment into a lifetime income stream.
