The financial services industry has a long history of making up terms to help sell its products. The latest term gathering attention is a “501(k) plan”. This blog post is a list of random observations, in no particular order, about the so-called 501(k) plan.
- The term 501(k) does not refer to a section of the Internal Revenue Code as does the 401(k) plan.
- There is actually a IRC 501(k) in the law but that code section has nothing to do with the way that the term “501(k) plan” is used in financial services marketing today.
- The term refers to the use of low-load and presumably high performance permanent life insurance as a superior alternative to traditional retirement plans.
- The term “501(k) plan” is not trademarked. It is used generically in this discussion to refer to a type of cash value life insurance plan designed to maximize cash value and the rate of return on investment using any insurance company’s life insurance products.
- The strategy is not new, it has always been used by high income individuals and businesses.
- The underlying strategy does have strong merit. This approach should be considered in conjunction with comprehensive tax and financial planning. Cash value life insurance does have many advantages.
- Cash value life insurance, properly designed, has tax advantages over traditional retirement plans.
- Cash value life insurance is safer than many other types of investments.
- Cash value life insurance, properly designed, provides asset diversification away from traditional stock and bond accounts.
- Cash value life insurance, in some cases, will outperform the rate of return on traditional retirement plans.
- The new Tax Cuts and Jobs Act law adds additional incentives to use this strategy. We should expect to see the use of cash value life insurance expand in financial planning as a safer alternative to traditional investments.
- Years ago I investigated no-load life insurance, along with other advisers and financial service writers, and the widely held opinion is that the no-load life insurance products were not “the best in the business”. Instead, a low-load policy from a top mutual life insurance company is likely to give overall better results. That conclusion appears to be valid today.
- The life insurance industry says that its products are “sold, not bought”. That is par of the reason that we don’t find much information online on this topic.
- Ted Benna, the “father of 401(k) plans” who is credited with development of the 401(k) plans in the 1980s is now endorsing the 501(k) marketing plan.
- Ted Benna was a personal mentor when I opened my first office in 1987 in Doylestown. I haven’t had contact since leaving Doylestown in 1992. I have no idea why is supporting this gimmicky marketing program.
- I sometimes rely on this strategy in clients’ financial plans but I do not use the 501(k) marketing term.
The best way to learn more about this strategy is to revisit your tax planning strategy and overall financial plans. Consider you age and health and try to make a realistic forecast of the number of years you expect to provide retirement income. Consider all the tax planning options available in light of your own goals and expected cash flow. If this 501(k) strategy is viable, it can easily be adapted,