COSTA MESA, Calif. - CNA Trust is re-introducing the idea of including life insurance as an investment option in defined contribution plans.
"It's been in plans since day one but went out of favor due to the move to daily (valuation) plans and the inability of record keepers to deal with it and the growth of mutual fund investments," said Frank Bruno, senior vice president of CNA Trust, a Chicago-basedsubsidiary of CNA Financial. "People went for what was hot and basically available."
For the past 33 years, long before anyone thought of creating a plan around section 401(k) of the Internal Revenue Code, CNA has been handling such policies, he said.
"Bottom line is many providers do not want to offer this due to complexity, record-keeping issues and the loss of assets in their funds," Mr. Bruno said. "To us, it's just another day."
"It's back to the future," said Joshua Dietch, consultant with Cerulli Associates Inc., Boston. "Life insurance did not work so well in a daily valuation world and there are more reporting requirements."
So, as mutual funds became more popular, life insurance drifted out of favor. So much so there are no readily available numbers on how much of the defined contribution asset pool is invested in life insurance, he said.
No one promoting
Before CNA Trust announced its new strategy, there were a few third-party administrators who could handle it, Mr. Dietch said.
"There's no one else aggressively promoting it," he said.
But CNA has found a way to make purchasing life insurance through a defined contribution plan like having just another investment option, CNA's Mr. Bruno said. Employees elect to direct a portion of their plan contribution into the life insurance option, called the Life Plus Account by CNA Trust. In CNA's program, deferrals must be 100% vested and only participant money can be used. The premium goes to the trust that pays the premium out of the participants defined contribution account.
CNA's strategy is offered through a self-directed brokerage account in the plan, explained John Brown, senior vice president of CNA Trust.
The advantage of buying life insurance is that it gives employees a way to buy life insurance with pre-tax dollars, Mr. Brown explained. It also gives people who don't think they can afford life insurance a way to purchase it, he added.
"Individuals use their 401(k) and so they don't think it's coming out of their pocket - it's someone else's money," Mr. Brown said. "It's a good idea if you don't think you have enough coverage."
When participants change jobs, the policy is surrendered. It can be rolled into an individual retirement account or the new employer's defined contribution plan, or participants can continue making the premium payments separately.
Limitations
But there are limits to the amount of money participants can invest in a life insurance investment option, said C. Frederick Reish, partner with Los Angeles-based law firm, Reish & Luftman. Participants can invest either 25% or 49.9%, depending on the type of life insurance policy that is purchased, term or whole life, respectively.
Moreover, the value of one year's insurance coverage is taxed through to the participant each year, Mr. Reish said. However, when the participant dies, their beneficiaries would receive, if whole life, a death benefit of the cash surrender and the risk portion, which is the difference between the cash surrender and the full death benefit.
"It's been common in the past, particularly with smaller companies," he said. "Larger companies did not offer it because they tended to provide significant benefits through a group term insurance policy."
But it is a way for companies to provide an added benefit, especially to their higher-paid employees, and for service providers to create relations with employees with higher account balances.
"As a practical matter, the people who have taken the most advantage are the officers of the companies, who have bought a significant amount of life insurance through their defined contribution plans," Mr. Reish said.
