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truphao: The life insurance policy is an asset of the Plan, it is as any other asset, owned by the Plan and the Plan is the beneficiary. The employee maintains a beneficiary designation on file, similar to other investments. Upon the death of the insured the death proceeds are passed to the Plan. Upon claim of the Plan's assets by the beneficiary, the life insurance proceeds are split, the net death benefit represented by the face amount of the policy minus it's cash value, is passed to the beneficiary income-tax free. The cash value is added to the other investment and becomes a taxable distribution eligible for transfer/rollover to an IRA or other retirement plan that accepts transfers/rollovers. The 1099 issued reflects the death benefit and the eligible distribution. The calculation of the the net amount at risk and the cash value is performed by the life insurance company as of the date of date showing exactly the face amount and cash value. If there is any basis in the policy (recouped economic benefit cost, known as the PS 59 cost), that is the responsibility of the insured to track.