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American General Life Insurance Company is a member of American International Group, Inc. (AIG). www.aig.com/AdvancedSales

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RETIREMENT PLANNINGIncidental Life Insurance in a Qualified Retirement Plan PRESENTED FOR

PRESENTED BY

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RETIREMENT PLANNINGIMPORTANT INFORMATION

This information is provided by American General Life Insurance Company (AGL) and The

United States Life Insurance Company in the City of New York (US Life), members of American

International Group, Inc. (AIG).

The information contained in this document is general in nature and intended for educational

purposes only and is not a comprehensive analysis of the topic presented. The information may

be subject to change and should be verifi ed for accuracy and reliability (e.g., federal income tax

statutes, rulings, etc. that may have changed since publication) and may be subject to differing

legal interpretations. While the publisher has been diligent in attempting to provide accurate

information, the accuracy of the information cannot be guaranteed. No representation or

warranty, express or implied, is made by AGL, US Life and its affi liates as to the completeness

of the information in this document. AGL and US Life shall not be liable for any loss or damage

caused by the use of, or reliance on, the tax, accounting, legal, investment or fi nancial items

contained in this material.

The Company, its fi nancial professionals and other representatives are not authorized to give legal,

tax or accounting advice. For advice concerning your situation, consult your professional attorney,

tax advisor or accountant.

To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that

any tax advice contained in this document (including any attachments) is not intended or written to

be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue

Code or (ii) promoting, marketing or recommending to another party any transaction or matter

addressed herein.

©2020. All rights reserved.

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RETIREMENT PLANNINGINCIDENTAL LIFE INSURANCE IN A QUALIFIED RETIREMENT PLAN

The Purpose To use qualifi ed money to provide needed life insurance protection to participants.

The Rules Because life insurance must be “incidental” to the plan’s main purpose—namely, funding retirement

income—there are limits on the amount of insurance protection a plan can purchase on behalf of a participant.

Under a defi ned benefi t plan, the insurance face amount generally cannot exceed 100 times the participant’s projected monthly retirement benefi t. For example, if the monthly retirement benefi t is projected at $4,000, the life insurance limit would be $400,000.

Under a defi ned contribution plan, such as a 401(k), less than 50% of the employer’s annual contribution can be allocated to the purchase of ordinary whole life insurance. The fi gure is 25% in the case of term or universal life insurance.

If a participant has included term or universal life insurance in the plan, 50% of the ordinary life premium plus 100% of the term or universal life premium must be less than 25% of the employer’s total annual contribution.

The Tax Consequences If the insurance is payable to the participant’s benefi ciary or estate, the value of the economic benefi t

provided by the “pure insurance” portion (death proceeds minus cash value) is reported in the participant’s gross income each year.

The “pure insurance” costs become part of the participant’s cost basis and may be recovered income tax free when retirement income is distributed.

The pure insurance portion of the death proceeds passes income tax free to benefi ciaries at the participant’s death.

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The Bottom LineLife insurance in a qualifi ed retirement plan is a cost-effi cient way to provide employees with needed insurance protection for dependents. Premiums paid by employer contributions can free up part of the participant’s disposable income that might otherwise have been used to pay insurance premiums.

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SUMMARYHOW IS LIFE INSURANCE USED IN QUALIFIED ARRANGEMENTS?Qualifi ed retirement plan participants can use life insurance to provide family protection when the insurance is “incidental” to the plan’s primary purpose—providing retirement benefi ts.

WHAT ARE THE BENEFITS?Life insurance inside a qualifi ed retirement plan can be a cost-effi cient way to provide needed life insurance protection for dependents. Often, employer contributions cover the premiums in whole or in part. In addition, its inclusion can free up part of the participant’s disposable income that might have otherwise been used to pay life insurance premiums.

WHAT ARE THE RULES?There are limits on how much protection the plan can purchase on behalf of participants:

In a defi ned benefi t plan, the face amount of insurance generally can’t exceed 100 times the participant’s projected monthly retirement benefi t. For example, with a projected $2,000 monthly benefi t, the life insurance limit would be $200,000.

In a defi ned contribution plan—including employer-sponsored 401(k) plans—the amount allocated to life insurance depends on the type of contract. With ordinary whole life insurance, the amount must be less than 50% of the employer’s total annual contribution. The fi gure is 25% for term or universal life insurance.

In a plan including both types of insurance protection, 50% of the ordinary life premium and 100% of the term or universal life premium must add up to less than 25% of the employer’s total annual contribution.

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WHAT IS THE TAX PICTURE?Insurance that is payable to the participant’s benefi ciary or estate can create a tax liability for the participant during the accumulation period. The amount included in gross income each year is the economic benefi t of the death benefi t provided by the “pure insurance” portion of the coverage. Pure insurance is determined by subtracting the cash value, if any, from the death proceeds.

On the plus side, the pure insurance portion of the death benefi t passes income tax free to the benefi ciary or estate at the participant’s death. Also, the taxable amount reported during the accumulation period becomes a part of the participant’s cost basis and may be recovered income tax free when distributions are received.

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