Life Insurance in a Cash Balance Plan - The Heritage Group

Retirement is approaching, are you ready? Some whole life policies have a guaranteed cash value plus dividends (typically offered by Mutual Insurance Companies) while other whole life policies have only a fixed interest rate (typically publicly traded insurance companies). Universal life policies generally have a fixed-interest rate attributed to their policies. There are differences between the two policies and to determine with which one is right for you will depend on a number of variables that should be discussed with your advisor in the initial planning stages. Some of these variables include: amount of overall plan contribution sought after, liquidity flexibility, protection desired, and estimated time-horizon for the length of the plan. How does life insurance work in your cash

balance retirement plan? Cash balance retirement plans have become increasingly more popular with small businesses. Cash balance plans offer many of the features that are attractive in a traditional defined benefit plan, while also including aspects that are similar to a profit sharing plan. One of the reasons cash balance plans are so popular is that contributions are more predictable and level when compared to other defined benefit plans. Contribution amounts for targeted individuals can often be significantly greater then what is permissible in a profit sharing plan. Also, as opposed to traditional pension plans, participants receive statements that illustrate a hypothetical account balance in a current lump-sum dollar amount rather than the traditional monthly benefit amount. As with all pension plans, plan trustees are responsible for the management of all assets in the plan. Many trustees choose to have an investment advisor or outside organization to take responsibility for creating their investment portfolio. The target investment return for the plan is generally conservative, with annual rates of return typically between 4% and 5%. As the portfolio is of a conservative nature, the underlining investments will also be on the conservative side. Typical investments usually will consist of CD’s, money markets, bonds, mutual funds, and life insurance. Of the five mentioned investment options, most people are familiar with the first four types. Many people do not know that life insurance can be included as part of the investment mix in your retirement plan, including cash balance plans. Life insurance is a necessary purchase for everyone Many people see it as an expense. In a cash balance plan, however, it becomes a valuable asset that can cover numerous goals. In properly administered plans, either a universal life policy with a fixed interest rate or a whole life policy can be used as a part of the investment line-up. One of the main reasons why life insurance can make sense as an investment is that it builds cash value. The cash value of the insurance policy becomes part of the investment mix of the plan, just as any mutual fund or CD would. In today’s low interest rate environment, the interest rates credited in these policies often make them very attractive investments when compared to money markets, treasury STRIPS or CD’s. What’s the Plan? The most important aspect of a cash balance plan to remember is that the plan is building towards...

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