"Informal" life insurance funding

An insurance policy purchased on the life of an employee, but which appears as an asset on the company's balance sheet — and in which the employee has no incidents of ownership — is not considered to be a "secured pledge." Thus, if properly arranged, life insurance can be used to create funds needed to pay the deferred benefit without losing the tax-favored treatment of the plan.

• The corporation insures the participant's life in the amount sufficient to meet its obligation under the plan.
• The corporation owns, pays for, and is beneficiary of the policy, to avoid current taxation, the insured employee must have no incidents of ownership in the policy.
• The premium is not tax deductible, but the cash values become a general asset of the corporation.
• When the employee retires, benefits can be paid from the policy's cash accumulation.
• The life insurance provides a pre-retirement death benefit and/or can serve as a form of key person insurance.
• If the employee dies after retirement, the death proceeds can provide a death benefit under the terms of the agreement.
• Corporate-owned disability income protection can be arranged to provide a disability income benefit under the plan.
• Cost recovery of plan expenses is possible.

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