Advanced Marketing Forum Question

2nd to Die Insurance in a 401(k)

Question:
A client presents with the following scenario that I’ve never seen before and wonder if any of you have encountered it.

The client’s 401(k) plan was recently amended to allow the purchase of life insurance. No problem there, but the insurance that plan trustee purchased was a second-to-die policy on Husband & Wife (both being eligible participants in the plan). I have never seen a second-to-die policy in a retirement plan setting.

At the very least, it seems to beg the question of alienation: if I’m the first to die, my 401(k) account gets nothing?

Has anyone seen this type of insurance in a plan before?

Reply #1:
A profit sharing type plan like a 401(k) that allows for employee direction of investment can allow the purchase of life insurance including 2nd to die. While the death benefit would not be payable at the 1st death, the cash value of the policy is part of the employee's 401(k) account. Assuming the participant dies, the surviving spouse can either 1) take a distribution of the policy (and probably gift to an irrevocable life insurance trust) while rolling over the remaining 401(k) account, 2) buy the policy from the plan and rollover the 401(k) account including the sale proceeds, or 3) the trustee can surrender the policy and the spouse can rollover the 401(k) including the surrender proceeds

James R Allen Jr., CFP, CLU, ChFC
Asst. Vice President, Advanced Markets
Wealth Management Group
MetLife Investors

Reply #2:
Yes, very much so. Unlike pension plans, profit sharing plans (a 401(k) is a profit sharing plan) do allow in the regulations for the purchase of incidental life insurance protection for the individual AND FAMILY members. Many companies who are active in the qualified plan market have provisions in their prototype plan documents for such sales and market them heavily. If you are the first to die, the family insurance goes to the spouse. That's the sale.

Ron Merolli
Allmerica Financial
Estate & Business Planning

Reply #3:
Providing the plan document authorizes it, incidental life insurance is an allowable investment in 401 type plans. Second-to- die is allowable as well and in recent years, has become more prevalent as an elected option . You mentioned that both husband and wife were plan participants. Do they both have a second- to-die policy or just one of them?

Peter Webster
V.P. Director Special Markets
Manulife Wood Logan
Phone: (800) 334-4437 x 7680
Fax: (203) 602-7557

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