Life insurance protection provided 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 retirement plans may include life insurance only as an incidental benefit, because the plan's primary purpose must be retirement savings. Incidental limits apply, such as a death benefit generally limited to 100 times the projected monthly pension benefit in a defined benefit plan, or a limited percentage of the account balance in defined contribution plans. Life insurance inside a plan also creates taxable term cost to the participant. The limits ensure that the death benefit does not dominate the retirement purpose of the plan. This is a rare and highly restricted use of life insurance.
Why the other options are wrong
- Coverage amounts are strictly limited so that life insurance remains incidental to the plan's retirement purpose; unlimited amounts are not permitted.
- Incidental life insurance is permitted in qualified plans under the limits, so it is not prohibited in all cases.
- Life insurance inside a plan is not treated as a cash contribution; special rules on taxable term cost and incidental limits apply.
Memory hook
In qualified plans, life insurance is a side dish, not the main course — strictly incidental.