Life insurance in 401(k)-PSP

Some basics -- assume the purpose of this policy is for investment purposes. Life insurance lets underlying investments grow tax deferred.

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:

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.

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://smallbus> The policy is not a cash building policy/investment. He bought it for

Thanks for the help