In a traditional defined benefit plan, this product type is possible. However, careful attention needs to be paid to the Incidental Test of the Internal Revenue Service, since UL is considered a term policy by the IRS for this purpose.
In a 412(e) plan, things are considerably different. When the details of ERISA were constructed back in the 1970s, UL had not yet been introduced. 412(e) funding must be calculated on the basis of level premiums, and are subject to decreasing premiums when excess interest or policy dividends are paid. Neither of those requirements would necessarily rule out Flexible Premium Universal Life, as long as the premiums were paid exactly as calculated by the third party administrator each year. However, most insurers choose not to offer their UL products for this market, presumably out of concern that actual funding could be at odds with the calculations of the administrator. Instead, Interest Sensitive Whole Life and traditional Whole Life are today’s products of choice.
Posted in: Plan Funding
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