quick WL question

[T in CA]

I have a friend who owns a WL (NML)policy on her ex-husband. Actually it's a variable whole life. Candidly, I don't deal with WL too much so I don't want to give her bad advice. Here is the situation:

The DB is around $360,000 and she wants to hold onto it until he dies so "she can throw a party" (her words...LOL).

She paid premiums of around $4k per year for over 20 years and recently stopped and is letting the policy/dividends pay them. There is now over $160,000 of cash surrender value.

She would like to use some of the cash, without jeapordizing the death benefit. Could she withdraw "up to basis" (probably a bit more than $90k) so there are no taxes and still have enough cash inside to carry the policy?

She likely needs to call them to get an inforce, but I figured I'd throw it out here to see if I can learn something. The variable nature is a wildcard and is she takes cash (or a loan) she may be best to go with a fixed account or something same with low volatility. Agree?

 

[DHK]

I'd rather see her borrow against it if she can pay it back rather than a withdrawal. The amount of the collateralized loan (should be) in a fixed account earning whatever it earns.

Here's the rub (and I think you know this), it's still a variable policy with its own investments costs, let alone costs of insurance. Investments tank and the costs of insurance increase for that year with the increased net amount at risk.

The only reason I see the difference between Variable Whole Life vs VUL is that variable whole life gets dividends. All the same structure rules seem to apply on the variable whole life.

Just my thoughts.

 

[WinoBlues]

Not an answer to your question.
However, as was brought up in a different forum post sh wants to make sure she has the beneficiary listed correctly as she is now an ex spouse.

 

[Allen Trent]

I have a friend who owns a WL (NML)policy on her ex-husband. Actually it's a variable whole life. Candidly, I don't deal with WL too much so I don't want to give her bad advice. Here is the situation:

The DB is around $360,000 and she wants to hold onto it until he dies so "she can throw a party" (her words...LOL).

She paid premiums of around $4k per year for over 20 years and recently stopped and is letting the policy/dividends pay them. There is now over $160,000 of cash surrender value.

She would like to use some of the cash, without jeapordizing the death benefit. Could she withdraw "up to basis" (probably a bit more than $90k) so there are no taxes and still have enough cash inside to carry the policy?

She likely needs to call them to get an inforce, but I figured I'd throw it out here to see if I can learn something. The variable nature is a wildcard and is she takes cash (or a loan) she may be best to go with a fixed account or something same with low volatility. Agree?

Couple things

1. Does she have a written right in the divorce decree to be the owner & beneficiary of this specific policy? If not, most states have laws that void any & all rights for an ex spouse to be an owner or beneficiary of many assets like insurance policies, etc. This means she may not be able to get money out if discovered she is no the spouse & also means if he dies, she wont be able to collect & the death claim could go to probate. See if the divorce decree spells it out about this specific policy. If it doesnt, she would need to get him to sign to allow her to own & her to be beneficiary as "ex spouse". If not done right currently, it may appear she owns it & is the beneficiary, but that legally may not be true even if she has been paying the premiums after the divorce. Divorce Decree &/or default divorce decree laws of the state will need to be looked into

2. Are you sure there is not loans on the policy anymore?

3. based on what she is attempting to do by stopping payments & harvesting cash & keeping policy, I think you are begging for a disaster of it crashing or creating automatic premium loans to cover premiums, etc.

4. normally, I might suggest she withdrawal/partial surrender to basis like you mentioned ( assuming it isnt a MEC) & then doing a 1035 exchange to a new paid up policy like a single premium WL or a no lapse UL/IUL . However, tough to do a 1035 exchange to a new life or new NQ annuity because she will need him to agree to be the insured on a new application of life or the annuitant on new NQ annuity as 1035 exchange requires new owner/insured to perfectly match on existing & new policy.

You really need to get more details like the inforce illustration & she likely needs to ask them to run the 2 or 3 scenarios you mention about stopping payments & taking large amount out. I just dont think it is going to look good.

Without a securities license, you shouldnt be giving her any advice on the investment component or sub account choices on the account, especially when you are not the rep on the policy or a rep for the carrier. be careful with that aspect for sure.

 

[Tahoe Ray]

normally, I might suggest she withdrawal/partial surrender to basis like you mentioned ( assuming it isnt a MEC) & then doing a 1035 exchange to a new paid up policy like a single premium WL or a no lapse UL/IUL .

This creates a boot transaction and all gain in the original policy will be taxed as ordinary income.

 

[scagnt83]

This creates a boot transaction and all gain in the original policy will be taxed as ordinary income.

Under a Withdrawal, it would only be considered Boot if they did not wait sufficient time in-between transactions and it was considered a Step Transaction.

I have no clue what that time period would be...

 

[Tahoe Ray]

I have no clue what that time period would be

Don't worry, the IRS will let you know after the fact.

 

[Allen Trent]

This creates a boot transaction and all gain in the original policy will be taxed as ordinary income.

I have not seen this actually occur. However, i have mostly seen this in proprietary crashing UL policies where the carrier actually allows clients to convert their UL to a Single Premium WL or premium paying WL without Underwriting. It is done essentially via a 1035 exchange & looks & feels like a reduced paid up option on the single pay version.

Very few people take money out prior to the change & some even deposit more money in the UL if premium room available prior to the change to get more coverage than current CV would buy

On occasion, people will want to take some money out of the UL in advance or extinguish a loan. In the non MEC, i have seen cost basis taken out & then remainder put in the single pay WL with same carrier. Carrier 1099 shows the UL withdrawal as 0 taxable (if WD less than cost basis). Then, another 1099 showing the 1035 exchange in same or future tax year reprting cost basis & gain to new policy

Have not heard of any of those few cases getting caught in an audit for boot, but it could occur.

Ironically, had all the money actually went to the single premium WL & same cost basis & taxable gain moved over, the tax payer could take the distribution after 1035 (in UL versions) or in the WL version i speak of, 75% of the funds go in PUAR accessible part of policy. That wouldnt be a boot transaction, but the policyholder would be screwed by paying the load charges of the new contract & if the 1035 was to a UL no lapse contract it would have load, higher surrender charges & mess with no lapse guarantee. Math wise, better to take money before than after........as long as IRS doesnt come & call it boot

Crazy stuff, likely written for the people avoiding taxes on huge amounts, but could ensnare some 88 year old widow on a $1k tax bill who was merely trying to save enough coverage for a burial while at same time getting a little cash out of crashing UL to pay for root canal & rising heating costs.

 

[Tahoe Ray]

proprietary

remainder put in the single pay WL with same carrier

That's the difference. Nationwide even has a special program where you 1035 the whole policy and they split it internally into different products.

I don't know why that makes a difference but it apparently does if done at the same carrier even if technically a 1035.

 

[Allen Trent]

That's the difference. Nationwide even has a special program where you 1035 the whole policy and they split it internally into different products.

I don't know why that makes a difference but it apparently does if done at the same carrier even if technically a 1035.

Bizarre stuff, these tax rules.

If they were NQ annuities issued in same year, the aggregate rule would apply & carrier would have to combine the calculations of cost basis & gain of both contracts to make sure consumer couldnt get to tax free cost basis before accessing total gains between the 2 contracts