Recently I received an e-mail from a physician requesting information about a defined benefit plan. On top of all that he mentioned the plan would be fully funded with a life insurance and fixed annuity policy. His question was, “what is my take on a fully funded DB Plan with life and annuity insurance?”
My response was simple, “evaluate the numbers and benefits”. Let me be a little more specific, if a 50 year old could contribute $205,311 or $161,203, which amount would they choose? Does funding with insurance make sense? Can the owner of the practice generate more annual retirement benefit because of a larger deduction? What happens to the death benefit when the physician decides to terminate the DB Plan?
Let me go back to my 50 year old, god I would love to be 50 again, sorry, I degress, if you contribute $205,311 or $161,203 the retirement income result will be the same…what? How can that be? When adopting a DB Plan the contribution is based by the assumed rate of return of the investment, in this case the return of life insurance premium via the cash value. In a traditional DB Plan 5%-6% rate of return has been the norm, however when the advisor adopts a 412(e)3 plan life insurance or annuities or a combination must be used. This is a wonderful idea for the life insurance agent, most guaranteed or whole life policies currently offer a 3%-4% credited return on premium contributions.(Same for fixed annuities) Well, lets do some math, the lower the return on investment the higher the deduction, and we all know physicians and other highly compensated business owners love that larger deduction, right?
I will leave you in suspense as to my other thoughts for my next post….
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