Life Insurance Under a Qualified Employee Plan

[Guest WyrickL]

If a plan has life insurance in it as a plan asset for 3 participants does the beneficiary on the life insurance policies have to be the plan or can it be an individual beneficiary? If it has to be the plan how is the benefit handled once the participant passes away?

[mbozek]

Normally the beneficiary is designated by the participant because in a dc plan the amount of the proceeds minus the cash value of the LI is exempt from income tax. In a DB plan the LI benefit is 100 times the monthly retirement benefit. However, the plan trustee can be the beneficiary of the LI proceeds and the LI can be paid to the benficaries as a taxable distribution from the plan or can be allocated to the remaining participants. In a DB plan the plan is sometimes named as the benefidiary of LI on the life of a key employee or owner to assure that the plan will have sufficient assets to pay benefits in the event of the owner's death or to pass on a tax free asset to the business through the trust (if the plan is terminated and the surplus assets are sold to a buyer of the business)