Section 457 Plans

Section 457 Life Insurance Plan

A section 457 Plan is a deferred compensation plan which allows employees of state and local governments, as well as some employees of nonprofit organizations to save for retirement on a before-tax basis. These “salary savings” can be used to fund a retirement vehicle, such as an annuity, or to pay premiums for life insurance.

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457 Life Insurance Plan Eligibility

A 457 plan for state and local government employees, as well as public school systems, can cover everyone, or any select group of employees the employer wishes. A 457 plan does not have mandatory coverage requirements, and the plan may be discriminatory

457 Deferred Compensation Contributions

100% of gross pay, up to $16,500 per employee is the maximum contributions for the 2009 Plan Year (some exceptions apply). In some instances, employees can make up contributions they skipped in prior years, utilizing the “catch-up” provisions.

The entire employee’s contribution may be used to purchase life insurance on a before-tax basis. If an insured plan participant die before the contract has been distributed at retirement or separation from service, then entire death benefit is taxable as ordinary income.

Generally, the employer owns the policy until death, or distribution following separation from service. The 457 plan participant is always fully vested in any plan values that accumulate from salary reductions. Annual policy statements will be sent to the employer who then typically will forward a copy on to the underlying (i.e. “insured”) employee.

Why Should You Purchase Life Insurance Inside a 457 Plan?

  1. The primary reason to purchase life insurance is for the death benefit. Because it is purchased with pre-tax dollars, life insurance purchased inside a 457 plan can be a cost effective way to purchase life insurance during your working years.
  2. The life insurance death benefit may enhance your survivorship benefits/options under a state sponsored defined benefit pension plan, using what is known as “Pension Maximization.”
  3. The cash surrender values of the life insurance policy may be used to provide additional retirement income.
  4. An optional waiver of premium for total disability benefit can be added.

Life Insurance Inside a 457 Plan

When a plan participant purchases life insurance with before-tax dollars, they are able to purchase more coverage with the same outlay than if the policy is purchased with after-tax dollars. This leverages the purchasing power of your premiums.

The following examples demonstrate the effects of purchasing life insurance inside a Section 457 Plan with before-tax dollars.

In the comparison, we use an Index Universal Life, which is available for use in the 457 deferred compensation market.

Assumptions

457 Index Universal Life

Index Universal Life

Female, Age 25

Before Tax Premiums

After Tax Premiums

Monthly Premium

$133

$100

Death Benefit

$285,000

$214,285

Taxes at Death if working*

($71,250)

$0

Net Death Benefit

$213,750

$214,285

Current Cash Value at 65

$278,351

$204,343

Taxes at conversion*

($69,588)

$0

Net cash value for retirement

$208,763

$204,343

Non-taxable death benefit

$264,433

$214,285

Female, Age 35

 

 

Monthly Premium

$266

$200

Death Benefit

$366,896

$275,862

Taxes at Death if working*

($91,724)

$0

Net Death Benefit

$275,172

$275,862

Current Cash Value at 65

$248,086

$184,444

Taxes at conversion*

($61,021)

$0

Net cash value for retirement

$187,065

$184,444

Non-taxable death benefit

$305,875

$275,862

Female, Age 45

 

 

Monthly Premium

$399

$300

Death Benefit

$334,825

$251,748

Taxes at Death if working*

($83,706)

$0

Net Death Benefit

$251,119

$251,748

Current Cash Value at 65

$142,755

$106,543

Taxes at conversion*

($35,689)

$0

Net cash value for retirement

$107,066

$106,543

Non-taxable death benefit

$299,136

$251,748

As you can see, with net equal premiums, the before tax 457 Life Insurance Plan produces more cash values for retirement, roughly equivalent death benefits during working years, and substantially more death benefits post-retirement.


* Loan amount is the amount of “Taxes at Conversion (25%)” which is when they retire, take a loan to cover the estimated cost of taxes assuming a 25% bracket. Figures shown are based on Illustrations run on 10/31/2009, using an assumed indexed interest rate in effect on that date, and is not guaranteed. Policy loans from life insurance policies generally are not treated as distributions or subject to income tax. Source:  Internal Revenue Code Section 7702.

Only through a general review of your specific situation can it be determined if there are tax advantages available to you through our products, one of which is life insurance. You should consult your tax advisor or attorney on your specific situation.

Actual results and tax rates will vary. The example is purely hypothetical and not representative of any specific policy with any particular company.

 

 

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