As I understand the regulations Life Insurance policies in a Governmental 457(b) Plan should be owned by the trust with the trust as the beneficiary and PS 58 income applied for DB over $50K. I have a client who has Life Insurance policies owned by the participants in thier plan.

What are the issues here and logical correction methods? On a broader note how did the plan provider allow these policies to be set up this way?

The provider was an idiot who got snookered by an insurance sales person. Probably violated state or local law in the process. Life insurance has no place in a governmental 457(b) plan. I am not saying that life insurance is not permitted under tax law.