I’m not anti-life insurance. In fact, I have life insurance, and I believe it’s one of the most important financial tools out there for protecting your loved ones. But when it comes to stuffing life insurance into a 401(k) plan, I have some strong reservations—and those reservations are grounded in reality, not theory.
Let’s be clear: I’ve seen what goes wrong when someone tries to get too clever with life insurance in a qualified plan. Sure, there are consultants and insurance agents who will spin it as an executive benefit strategy or a way to build cash value in a tax-deferred wrapper. But when the rubber meets the road, these arrangements often blow up in the face of the plan sponsor—and it’s the kind of explosion that can cost you the qualified status of your plan.
I’m not going to go into the defined benefit plan disasters where the plan is nothing more than a shell to pay insurance premiums—though I’ve seen enough of those trainwrecks to fill a chapter in a compliance horror storybook. I want to talk about what I see in 401(k) plans.
Problem #1: Discrimination Issues
Too many times, the life insurance component is offered only to company owners or a select group of executives. That’s a benefit, right, and feature. And if that benefit isn’t available to the rest of the plan participants, guess what? You’ve got a discriminatory feature that can cause a compliance failure. A 401(k) plan isn’t a private club for the C-suite. If you want to offer life insurance, it better pass coverage testing and be nondiscriminatory. Otherwise, you’re playing games with your plan’s tax qualification.
Problem #2: Titling the Policy
Here’s another compliance grenade I see too often: the insurance policy is titled directly in the name of the participant. That’s a problem. When an asset is held in a 401(k) plan, it needs to be held by the plan. If the policy is titled in the participant’s name without clearly being owned by the plan, you’ve just crossed into prohibited transaction territory. ERISA doesn’t play around with this stuff.
It’s not enough to say “Well, it’s in the plan documents.” It has to be executed properly—ownership needs to be in the name of the plan, there must be clear documentation, and it must comply with DOL and IRS rules. Otherwise, you’ve just created a liability where there didn’t need to be one.
Problem #3: Nobody Knows What They’re Doing
Let’s be honest. Most of the life insurance in 401(k) plans that I’ve seen was pitched by someone who didn’t fully understand the ERISA ramifications. This is not a plug-and-play product. If you’re not working with a team that understands both qualified plans and the nuances of insurance within those plans, you’re asking for trouble.
Look, I’m all for creativity in plan design when it serves participants, complies with the law, and avoids risk. But stuffing life insurance into a 401(k) plan because someone convinced the business owner it’s a slick tax shelter? That’s not creativity—that’s negligence.
Final Thought
If you’re a plan sponsor, keep it simple and compliant. Don’t chase shiny objects. Focus on good providers, reasonable fees, and a prudent process. That’s what ERISA demands—and that’s what protects your plan and your business.
And if you still want to put life insurance into a qualified plan? Fine. Just make sure your advisor actually knows what they’re doing. Because the IRS and DOL won’t accept “We didn’t know” as a defense.
