Life insurance coverage inside a qualified retirement plan is permitted only:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The Internal Revenue Service permits life insurance inside qualified retirement plans only to an incidental extent, meaning it must be subordinate to the plan's retirement purpose. The life insurance is incidental if the death benefit is no more than a specified multiple of the monthly retirement benefit, or if the premiums for insurance are no more than a stated percentage of the employer contribution. Coverage beyond the incidental limits disqualifies the plan or the policy's favorable tax treatment. The requirement ensures the plan primarily provides retirement income, not life insurance protection.
Why the other options are wrong
- Life insurance cannot be the primary purpose of a qualified plan; the plan must principally provide deferred retirement benefits to participants. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
- There is no unlimited allowance; the incidental-benefit rules cap the amount of insurance relative to the retirement benefits provided. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
- The incidental rules apply based on the benefit structure, not employee age; there is no age-59½ threshold for insurance in qualified plans. This option therefore does not match the facts presented in the question and is not the correct answer to select.
Memory hook
In qualified plans, life insurance rides along only as an incidental benefit.