An employer funds a fully insured pension plan by making annual deductible contributions for eligible employees; the employees are not taxed on the contributions. The plan then purchases annuity contracts, with guaranteed rates of return, from an insurance company. The minimum interest rate guarantee for the annuity and the guaranteed settlement option become the funding assumptions for the plan. The accrued benefit for participants is measured by the cash surrender value of all insurance contracts. When an employee retires, the annuity pays an annual retirement benefit taxable to the employee. Any death benefit distribution from the annuity is taxable income to the beneficiary.
By including an insured death benefit in the plan, the employer can make additional tax-deductible contributions to the plan to purchase life insurance on the employees' lives. No income taxes are payable at the pre-retirement death of the participant on the net amount at risk — that is the difference between the policy's cash value and its total death benefit — so the beneficiary receives these dollars income tax free. This treatment is allowed because the participants must recognize the cost of the current economic benefit as taxable income each year.
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.