Now we will further show a key difference between two different kids of defined benefit plans, and why that makes the Fully Insured Insurance Pension plan a perfect fit for the profile discussed.
How is a Fully Insured Pension Plan Funded
While the traditional defined benefit plans are funded with a wide range of investment options, funding for the Fully Insured Pension Plan is accomplished through products available exclusively from insurance companies, with fixed annuity, or a combination of fixed annuity contracts and whole life insurance contracts in which the life policies are used to protect the insured's beneficiaries in the event of death before retirement.
Front or Rear Loaded Contributions
A traditional defined benefit plan is deemed rear loaded, meaning it uses higher (non-guaranteed) funding assumptions, based on market conditions, therefore an employee's benefit grows slowly during the early years, then rises sharply as they grow older.
In contrast, the fully insured pension plan typically enjoys larger annual contributions (in other words, larger tax deductions) because it is required by law to use the conservative (guaranteed) assumptions of fixed annuity contracts, which means the plan generally allows larger contributions in early years. Overtime, excess interest earned above the guaranteed minimum interest rate will decrease the required contributions.
The Bottom Line
The design of the fully insured pension plan is very appealing to the older business owners who are looking to front load their contributions and tax deductions.