Group Term Life Insurance - company as beneficiary

[mariemonroe]

Company owned 7 life insurance policies on the life of a shareholder. The purpose of the insurance was to fund the company's repurchase obligation of shareholder's stock upon shareholder's death. Shareholder died, and, of the 7 company owned policies on his life, only 3 (non group term) policies named the company as beneficiary. Shareholder had designated his family members as beneficiaries of the remaining 4 (group term) policies. According to surviving shareholders, the intent was that company be named as beneficiary of all 7 policies.

Attorney for insurance carrier of group term policies responded that "it is against ERISA" for company to be named as beneficiary of group term policies on the life of an employee.

Anyone familiar with such a prohibition?

[J Simmons]

If it is an ERISA plan, then the fiduciaries--those making decisions about the LI policies--must discharge their "duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries" ERISA § 404(a)(1)(A)(i). Maybe that's what the insurer's attorney is referring to.

[GBurns]

If there was such a blanket prohibition by ERISA, I doubt that there would be so many thousands of Entity Purchase etc Buy/Sell arrangements which are funded by life insurance.

I suggest that you get that attorney/lawyer to be more specific.

I also suggest that you find out the factual written reason for the purchases. This should lead you to the agreements that will tell you what was intented etc. Have you found the Buy/Sell ? Have you had any input from the insurance agents and advisors who structured the arrangement ? What do the policy applications say ?

It could very well be that the beneficiary designations were intended that way so that the share purchases would end up in a pre-determined manner, which everyone haas forgotten about. That is why the documentation outside the policy is important.

By the way, I am wondering How you know the various designated beneficiaries yet still have this sort of question? In the past whenever I saw this it always turned out to be incorrect.

[Guest Sieve]

This isn't an ERISA question, I beleive. What I'm hearing is a corporate-owned life insurance (COLI) issue, where the company is treated as having an insurable interest in the life of certain individuals so that it can receive tax-free insurance proceeds in order, in this intance apparently, to buy back the key employee's stock. PPA '06 changed COLI significantly, so that no longer can a company retain COLI on rank-and-file employees who have been gone for over 12 months (I believe) or else the insurance proceeds at death are excluded from the employer's income only to the extent of premiums paid. Even if this is an ERISA plan (which I do not think it is), state law will determine who has an insuranble interest in someone's life--and an employee certainly should be among the list. I'd be very surprised (to say the least) if the agent's statement was not wrong.

How to deal with the insured's apparent disregard for the intention of the insurance policies is a different story. But, if the agent told the deceased to make the beneficiary change because the company was asking him/her to do something that was not allowed by law, then, Houston, we may have a problem.