Life Insurance is defined as a method to provide an immediate cash estate to an individual designated by the named insured upon the death of the named insured. Life Insurance was developed to provide funds for survivors upon the premature death of an individual who is the source of support for the survivors. This named insured is often the breadwinner who is the sole support for family members and when death is premature, that source of support ceases. Life Insurance proceeds provide at least a partial replacement for that loss of financial support.
But many individuals also use Life Insurance as a tool to supplement their retirement funds. When an individual does not want to rely on Social Security or Company Pension Plans to financially fund
Retirement. Life Insurance is often the tool used to accumulate additional funds for retirement uses.
Various Retirement plans have been developed to adequately provide for someone to build additional cash for retirement. Some of these plans can also have income tax benefits by making the deposits into the plans income tax deferred, as well as the earnings on the plans until they are withdrawn.
Qualified Plans meet certain requirements of the Internal Revenue Code and thus qualify for tax benefits. The purchase of life insurance as part of the funding tool in a retirement Plan is limited with regards to the death benefit. These limitations are imposed to provide for limited incidental death benefits to make the plan qualified for these tax benefits.
Defined Benefit Plans offers benefits that are determined using a definite formula. Contributions to defined benefit plans must be made in amounts that fund the benefits promised to plan participants.
Defined Contribution Plans – Focuses attention on defining the contributions made to the plan as opposed to the benefits the plan will pay out. Often tied to company profits and company is obligated to provide a specific retirement benefit to the employee. These are usually Profit Sharing Plans, Pension Plans and
401 Ks.
Non Qualified Plans do not receive the tax benefits. These are usually individually funded plans Individual Retirement Accounts and Annuities and my not qualify for the Tax Benefits.
I R A's - Individual Retirement Plans are established individually to fund retirement income. IRA's may or may not be given tax benefits, depending on variables of income of the participants and whether they are participating in other retirement plans, i.e. employer plans, etc. Earnings from the IRA are tax deferred.
Funding instruments for IRA's can be:
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