I have life insurance and it\u2019s an important financial tool to protect your loved ones. I\u2019ve never been a fan of maintaining a life insurance policy within a qualified plan and that bias against it is because of the compliance errors I\u2019ve seen with these plans.<\/p>\n
I\u2019m not going to stress the defined benefit plan issues when the formula and required contribution is used solely to pay for life insurance premiums (which becomes a huge problem when the plan sponsor has to freeze the plan while experiencing economic stress). I\u2019m going to stress the problems I see with life insurance on a 401(k) plan.<\/p>\n
Too many 401(k) plans have a benefit, rights, and features discrimination problem when they only allow that insurance window for owners of the company. In addition, another problem is with the titling of the insurance policy, especially when its totally in the name of the insured. That\u2019s a problem because the transaction may be labeled as a prohibited transaction if there is nothing that specifies that the policy is part of the plan. Unless you\u2019re developing a 401(k)m insurance program with someone with the experience in the subject area, you\u2019re going to have issues that threaten the qualification of the plan.<\/p>\n
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