Why Buying Life Insurance in a Qualified Plan is a Terrible Idea

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Recently I had an advisor call me to ask me about buying life insurance in a qualified plan. The advisor told me when he talked with the Guardian Life Insurance Company he was told that their defined benefit plans typically use 50% cash value life insurance in them. I said of course they do and it reminded me that I haven’t sent my annual it’s a terrible idea to buy life insurance in a qualified plan newsletter.

Answer the following question:

If your clients could invest $100,000 and let it grow for 20 years where at the end of 20 years the amounts equaled the following, which one should your clients purchase?

  • Investment A after 20 years = $200,000 
  • Investment B after 20 years = $300,000

Of course the answer is B. Why?

Because both investments cost the same amount and after 20 years, B was worth $100,000 more. The decision is a no brainer.

Answer the following question:

If a business owner could take a deduction using life insurance in a qualified plan that is $150,000 a year vs. a plan with NO life insurance where the deduction is $100,000 a year, which one would the affluent business owner choose?

Of course, the answer is the plan WITH life insurance as an investment because the deduction is larger.

Answer the following question:

If the qualified plan with the $150,000 deduction generated the SAME retirement income as the one with a $100,000 deduction, which plan should you as the advisor recommend?

The answer is the one with a $100,000 deduction.

The answer to the last question is why it makes NO sense to buy life insurance in a qualified plan.

Roccy DeFrancesco, JD, CAPP, CMP
Founder, The Wealth Preservation Institute
Co-Founder, The Asset Protection Society