Question

Qualified plans require that the purchase of life insurance be governed by what are described as “incidental limits.” What is the limitation on purchasing life insurance in a profit sharing plan?

Answer 1

All profit paying or qualified plans may allow the purchase of life insurance on a tax favorable basis but there are limits on the purchase by way of the amount of contributions made. The limits are:

1.Total premium must be less than 50% of the total employer contributions to the plan for life insurance.

2.Total premium must be less than 25% of term life insurance.

3.Upto 50% of employer contribution and salary deduction contribution can be used to buy life insurance in the first 2 years of participation in a profit sharing plan.

4.Upto 25% of deductible employee contributions and salary deduction contributions can be used to buy universal life insurance and term insurance.

I hope that was helpful :)