Key Man life insurance in a DC plan; plan is owner and ER is beneficiary

[katieinny]

A retirement plan holds a key-man life insurance policy. The plan is the owner and employer is the beneficiary. The question I was just asked is can someone else be named as the beneficiary of the difference between the current value of the policy and the death benefit amount? I've never had a good grip on the nuances of life insurance in a plan. From my perspective, the plan is the owner and beneficiary -- period. When the participant dies the proceeds go into the plan and are paid out in accordance with the beneficiary form on file. I haven't been able to find information on how key-man insurance is handled in a plan. Thanks for any insights you can offer.

[Bird]

I'd check to make sure it really is "key man" insurance (owned by the plan and [supposed to be] payable to the plan, for the benefit of all participants in the event of death). In that case, it would have to be a pooled account, and premiums would have to have been treated as expenses of the plan as a whole and not charged to any one participant's (the owner) account. It's allowed, but I've never ever seen it. And, considering the cloak of stupidity that often comes with life insurance transactions, as evidenced by the following...

The plan is the owner and employer is the beneficiary.

...it's worth looking into. If it really is key man insurance then tell them to change the bene to the plan; no other options.

[katieinny]

Okay, I will get confirmation to make sure that I didn't misunderstand. For argument's sake, let's say the beneficiary is the plan (as it should be). Then even if it's called key-man insurance, it certainly isn't benefitting the employer as key-man insurance is meant to do. And I still don't know if a different beneficiary (other than the plan, if you're right) can be named for the amount that's the difference between the current cash value and the death benefit. Although, I don't think this question would have come up if the plan had been named as the beneficiary, because then the assets would have gone the participant's beneficiaries anyway. I think the question came up because he wants his family to get some of the proceeds instead of the employer getting all the proceeds from the policy.

[Bird]

I don't think this question would have come up if the plan had been named as the beneficiary, because then the assets would have gone the participant's beneficiaries anyway.

That statement is confusing me. Because you called it key-man insurance, I thought it was being held for the benefit of the plan as a whole (of course the fact that the employer was the bene clouds that conclusion). As I noted earlier, it is possible for the plan to pay for the premiums out of the general assets of the plan (but only if it is a pooled investment plan), as an expense that is allocated as part of the gains or losses, and then the proceeds would (should) be payable to the plan, and those proceeds would become a gain that is allocated among all participant accounts. But somehow I doubt that's what happened. In fact, now I think I get it - an insurance agent used the "key-man" angle to make the sale, and then he said, mmm, where is there money? Oh, there's money over here in the plan! Let's use it. So you get this messed-up result.

If I wasn't clear about it, no, there is no way that ANY of the proceeds should be going anywhere other than to the plan.

You also need to find out if the plan as a whole has been paying the premiums (unlikely) or if the premiums have specifically been taken from the owner's "account", whether that is a theoretical account in a pooled plan or an actual separate account in a self-directed plan (or if the premiums have been paid directly by the company and treated as contributions to the owner; same thing and perhaps most likely).