I have life insurance and it’s an important financial tool to protect your loved ones. I’ve 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’ve seen with these plans.

I’m 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’m going to stress the problems I see with life insurance on a 401(k) plan.

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’s 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’re developing a 401(k)m insurance program with someone with the experience in the subject area, you’re going to have issues that threaten the qualification of the plan.