Life insurance purchased inside a qualified retirement plan:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Qualified plans are designed primarily to provide retirement benefits, but a small amount of incidental life insurance may be included. The coverage must meet specific limits so that the plan remains primarily a retirement vehicle rather than a way to fund life insurance with pre-tax dollars. Coverage beyond the incidental limits threatens the plan's qualified status. This makes life insurance inside a qualified plan one of the very limited situations allowed under the plan rules. The incidental limit is usually expressed as a percentage of the plan's accumulated retirement funds or of the planned retirement benefit.
Why the other options are wrong
- B) Incidental life insurance is permitted within prescribed limits; it is not categorically prohibited by federal law. The purpose is to keep the plan primarily a retirement program rather than a tax shelter for insurance.
- C) The primary purpose of a qualified plan is retirement income; life insurance may only be an incidental benefit. Federal law permits incidental coverage within prescribed limits, so it is not categorically prohibited.
- D) Incidental limits cap the amount of coverage, so unlimited purchases would violate plan qualification requirements. The primary purpose of a qualified plan is retirement income; insurance is only a supplementary incidental benefit.
Memory hook
Qualified plan life insurance: allowed only as a side dish, never the main course. Keep it incidental or lose the plan.