Insurance Busting Out The Joint (DB Plan)

In the movie GoodFellas, Paulie Vario played by Paul Sorvino is offered an ownership stake in a nightclub to protect the owner, Sonny, from the attacks of Tommy DeVito, played by Joe Pesci. Instead of taking an interest in running the nightclub, Paulie simply starts buying items on the credit of the club without the intention of paying the money back. He intends to “bust the joint out”. When no credit is further issues, Paulie’s gang burns the nightclub down.

December always reminds me of the mad rush to implement new retirement plans before the year is over. At my old employer, we had an insurance agent who referred us work. His name was Charlie. While he thought he knew about retirement plans, he didn’t. All he knew how to do was write extravagant insurance policies to be placed within defined benefit plans. Out of every 10 defined plans brought to us, nine would blow up within 3 years as the plan sponsors struggled to make the minimum contributions that was needed to fund the plan and fund the whole life policies within the plan. Eventually, the plan sponsors eventually had to freeze the plan and forfeit the policies. What the plan sponsors had thought was a vehicle for retirement savings was merely a vehicle for Charlie to write extravagant whole life policies.

There is a proper place of insurance for retirement savings. Insurance can augment retirement savings, but retirement savings should not augment the sale of excessive insurance. As with any profession, there are good and bad insurance agents. The good agents will sell you the insurance you need. The bad agents smell the quick buck and sell you insurance that you don’t need and can’t afford.

A defined benefit is the most attractive savings vehicle for retirement planning because it gives you the potential of the most allowable deductions for the employer and it is funded by the employer. Using the wrong insurance agent, it merely serves up an opportunity to bust the plan out for an onerous life insurance policy that will end up lapsing.