Qualified Life Insurance

For the qualified life insurance, life insurance proceeds in the excess of an insurance policy’s cash surrender value are excluded from income. The cash surrender value instantly before the death of the insured is treated as an insurance plan distribution includible in income except to the extent exempted.

Although regulations permit plans to provide qualified life insurance coverage for family members of the participant, the purchase of a cash value policy on a loved one’s life could result in a premature distribution if the loved one becomes deceased prior to the participant reaching the age of 59 ½. Selecting a second-to-die qualified life insurance policy on the lives of the participant and loved one would avoid this probable dilemma.

The amount of the qualified life insurance policy proceeds in excess of the cash surrender value instantly prior to death is not subject to excise tax according to Sec. 4980A. This may actually be a substantial advantage for those with qualified life insurance balances from a large retirement plan.

When it comes to retirement benefits, profit-sharing plans and pension, qualified life insurance may be provided with applicable rules. Depending on the type of qualified life insurance plan, the maximum amount of the funds that can be used to purchase the insurance ranges from 25% to 100%.

The cost of qualified life insurance coverage purchased must be included in the gross income of the employee if the proceeds are payable to the beneficiary of the employee or employee. For this very purpose, “cost” isn’t the premium payment.

Although the purchase of qualified life insurance coverage appears to be a distribution of an insurance plan—which provides the insurance plan participant with an updated taxable benefit—the cost of insurance coverage included in an employee’s income is not considered a distribution for premature distributions tax purposes of the 10%.

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