Jump to content
Sign in to follow this  
minnieme

Life Insurance Thru A 403b?

Recommended Posts

Everything I have read states annuities (variable and fixed) and mutual funds are the only options for 403b deductions. Does life insurance qualify for before tax dollars?

Share this post


Link to post
Share on other sites

The law allows life insurance to be part of a 403(b) plan. However, there are rules in place to ensure that the insurance remains "incidental" to the retirement plan.

 

Among those rules are limits on the amount that may be used to purchase life insurance. Generally, only one-half of the cumulative amounts contributed to the 403(b) plan may be applied towards cumulative life insurance premiums. The one-half reduces to 25% in the case of term insurance or universal life insurance policies.

 

There is also a requirement that the insurance be removed from the plan at retirement. This can be accomplished by surrendering the policy or distributing it from the plan (essentially paying ordinary income tax on the cash value of the policy).

 

In addition, the value of the cost of insurance must be included in your gross income each year prior to retirement while the insurance is part of the 403(b) plan. This so-called PS 58 cost represents the annual cost of the pure insurance protection.

 

If you're thinking of adding life insurance to your 403(b) plan, there are a couple of suggestions I offer. First, make sure that your employer permits life insurance to be purchased in the plan... many employers prohibit the use of life insurance as part of a 403(b) plan.

 

Second, make sure that there is a definite need for the insurance that can't be better filled outside of the plan. All to often, people are so intrigued with the idea of paying life insurance premiums with pre-tax dollars that they don't look at alternatives. In the dozens of situations in which I've been involved, purchasing life insurance inside a retirement plan is a poor idea... it's better to buy the insurance outside of the plan with after-tax dollars. Remember, the fundamental purpose of a retirement plan is to accumulate money for retirement. Life insurance does a poor job of accumulating cash, relative to alternatives available for use in retirement programs.

 

Do your homework and choose wisely.

 

Hope this is of some benefit to you.

Share this post


Link to post
Share on other sites
Guest Chuck Yanikoski

Michael's reply is right on the money.

 

In addition, if you STILL think you want life insurance in your 403(b) plan, make sure that the insurance company can separately track insurance premiums paid via 403(b) versus those paid out of pocket.

 

There is a good chance in any given case that employment will end before it is time to stop paying premiums. If you stop paying premiums anyway, the policy either has to be surrendered or, probably, it will start losing value. Either way, your return on investment will prove to have been particularly poor. But if you continue paying premiums, these payments have a tax status different from those paid under the 403(b) plan.

 

If the insurance company cannot track these premiums separately, you could end up with a tax accounting nightmare when you start withdrawing money from the policy.

 

My experience is that few if any companies actually do this kind of tracking. That's why you will find that large insurance companies, as much as they love selling life insurance, do NOT sell life insurance in this market: doing it correctlyis just too difficult and costly, and they are unwilling, whether for legal or customer service reasons, to do it incorrectly. For the most part, companies that ARE willing to sell in this market are small and are not being scrupulous about the accounting. So watch out!

 

Share this post


Link to post
Share on other sites

I was waiting for someone like Michael and Chuck to come along and give you the FACTS. They, or someone as knowledgeable, had filled me in several years ago on this board, but when I searched to old board yesterday my search skills were not adequate.

 

Despite what Michael and Chuck say, this is a very common tactic out here in 403b land. I've had several agents from different companies, including some of the big ones, trying to do this. Beware! The numbers they use don't work. Read the fine print repeatedly and then read it again.

 

They like to push using your 403b policy to cover the amount of your pension. The amount of money your heirs would lose if you die and don't collect your state/county/district pension for umpteen years. They also use this instead of using the spousal option on the pension.

 

There's another one that involves self-insuring for long term care costs using life insurance with "guaranteed" value within your 403b and then taking tax free loans from there. The numbers work out better self insuring without spending on their commissions and costs just using a 5% long bond rate of return.

 

Roberta

Share this post


Link to post
Share on other sites

Hi Minnieme,

Like Roberta, we are teachers or just plain consumers in the very complicated area. I keep all of my insurance needs very separate from my 403b investments. That way, you avoid any possible compromising of your 403b. 403b is for retirement, not insurance. I have lots of insurance as we all should have as we get older and need to protect assets, but I know what I am paying in both 403b and for my insurance premiums.

The pros will give you the possibilities, which are accurate, but as a consumer, their advice in this area is not adequate. I have been studying this issue for some time now and I have no idea what Chuck and Michael are talking about. But then again, with all due respect to them, I don't care. Hundreds of posts have been made asking the same or similar questions about life insurance (or Mortality and Expense coverage in 403b) and to my knowledge, the definitive answer to your question remains unanswered. If you have to depend on an agent to explain what it all means, then its too complicated. If I don't understand it, I avoid it. I keep my retirement plan and my insurance plans simple. I know and that is what makes me feel comfortable. Manytimes in life, "less means more." More money in my pocket, that is.

Just keep them separate and that is the advice I have been hearing for quite some time now.

Good luck,

Steve

 

Share this post


Link to post
Share on other sites
Guest Guest_LBJackson

Be Warned when it comes to Life Insurance purchased within a 403(b). I am putting my voice into this chorus because somany teachers have fallen prey to this scheme. I hadn't heard of the LTC insurance angle until today. What a racket!

 

This particular program i.e. life insurance inside a qualified plan like a 403(b) has been lawsuit bait for many an attorney and their clients who learned too late the scam sold them.

 

Steve and Roberta are right on, we are teachers in a complex world of insurance and investments. They are not the same thing, so it is wiser to keep them separate.

 

And re-read Mike's comments. His suggestion of looking elsewhere to fulfill your life insurance needs is most wise. Within the 403(b), or perhaps the TSA insurance salesman's pitch, you are convinced that you are buying two things with the same invested dollar. Too good to be true, wouldn't you agree?

 

Well...that's my 2 cents worth.

 

Toodles, y'all.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...