What's the difference between simply taking out a loan and policy loan?

[Allen Trent]

If any unpaid loan amount and interest exceeds the cash value of the policy that's when the trouble begins.

Very true, but the real trouble is actually if such a policy with large loans lapses or is cashed in some day when a person forgets in their 80s or 90s why they bought it & why the statements look so bad with all the charges & interest compounding. All those years of compounding interest is counted by the IRS in the gains calculation, meaning a person who only took out $50k 40 years ago really is treated as if they took out $500k & will get a huge tax bill if policy lapses or is cashed in, even if the policy has little or no money left in it. Very few agents & almost no consumers understand how loan interest counts against them in the IRS life insurance taxable gain calculation.

 

[f55c6]

Very true, but the real trouble is actually if such a policy with large loans lapses or is cashed in some day when a person forgets in their 80s or 90s why they bought it & why the statements look so bad with all the charges & interest compounding. All those years of compounding interest is counted by the IRS in the gains calculation, meaning a person who only took out $50k 40 years ago really is treated as if they took out $500k & will get a huge tax bill if policy lapses or is cashed in, even if the policy has little or no money left in it. Very few agents & almost no consumers understand how loan interest counts against them in the IRS life insurance taxable gain calculation.

I agree with everything you said regarding the tax consequences. The "real trouble" part of my post was meant to describe the policy holder's first notification their policy was about to explode, crash and burn unless they finally make good on their loan.

My suggestion is to simply not take a policy loan unless you have a real emergency need and then only if you have a plan to pay it back within a reasonable time.

 

[Allen Trent]

I agree with everything you said regarding the tax consequences. The "real trouble" part of my post was meant to describe the policy holder's first notification their policy was about to explode, crash and burn unless they finally make good on their loan.

My suggestion is to simply not take a policy loan unless you have a real emergency need and then only if you have a plan to pay it back within a reasonable time.

110% agree. But a ton of agents promote it as a perfect tax plan compared to 401k, Roth, etc. Requires perfect adherence for 50-90 years by the consumer & the agents that will be lomg gone to monitor the plan for that length of commitment

 

[f55c6]

110% agree. But a ton of agents promote it as a perfect tax plan compared to 401k, Roth, etc. Requires perfect adherence for 50-90 years by the consumer & the agents that will be lomg gone to monitor the plan for that length of commitment

All the retirement plans you mentioned are superior for "retirement" purposes and have less moving parts over a life insurance policy regardless of the flavor of policy you choose.

I was 36 when I purchased the VUL and I've been fortunate that my original agent is still around when needed. Over the past 10 years I've been having him prepare an in-force illustration every two years and even annually a few times. He has been very helpful. I always ask to depict a 6% gross return (net 4.5%) versus the 7-8%. The VUL is something you have to manage similar to a 401K and unfortunately I did not understand that at the onset. I was putting too low of a premium inside the policy and maxing my 401K.

I personally met with my agent at his office most recently in 2019. I needed to discuss switching the DB option from an increasing DB to a level DB. I ultimately did so to lock in the DB in the event the market dived. The market was up and I didn't need any higher DB at my stage in life. At the time he asked me why I had been transferring so much from the sub accounts to the fixed accounts. As I mentioned in my OP, the sub account pays 4% risk free and since 2008 T-Bills, I Bonds etc..., were earning nothing. I simply said I'm taking my profits and protecting the profits I've accumulated. I remember the sub accounts were going up practically every single day for a few years. I thought I was a genius. Well, todays market is the very reason I transferred so much money to the fixed 4% account. My sub accounts are down 18-20% versus being up 37% on the year and will likely be down in 23 at our current fiscal state of affairs. This policy was intended to be purely an asset for my heirs. Not a retirement account.

 

[Allen Trent]

All the retirement plans you mentioned are superior for "retirement" purposes and have less moving parts over a life insurance policy regardless of the flavor of policy you choose.

I was 36 when I purchased the VUL and I've been fortunate that my original agent is still around when needed. Over the past 10 years I've been having him prepare an in-force illustration every two years and even annually a few times. He has been very helpful. I always ask to depict a 6% gross return (net 4.5%) versus the 7-8%. The VUL is something you have to manage similar to a 401K and unfortunately I did not understand that at the onset. I was putting too low of a premium inside the policy and maxing my 401K.

I personally met with my agent at his office most recently in 2019. I needed to discuss switching the DB option from an increasing DB to a level DB. I ultimately did so to lock in the DB in the event the market dived. The market was up and I didn't need any higher DB at my stage in life. At the time he asked me why I had been transferring so much from the sub accounts to the fixed accounts. As I mentioned in my OP, the sub account pays 4% risk free and since 2008 T-Bills, I Bonds etc..., were earning nothing. I simply said I'm taking my profits and protecting the profits I've accumulated. I remember the sub accounts were going up practically every single day for a few years. I thought I was a genius. Well, todays market is the very reason I transferred so much money to the fixed 4% account. My sub accounts are down 18-20% versus being up 37% on the year and will likely be down in 23 at our current fiscal state of affairs. This policy was intended to be purely an asset for my heirs. Not a retirement account.

Awesome. Great that you fully understand & are paying so close attention. That is very rare in my experience. Likely a good move that you changed to level, especially if you have so much in fixed account. I have alot of old fixed account UL & Annuities guaranteeing 4-4.5%. the risk you have with so much in fixed though, is that as you age, the internal cost of insurance will escalate as you age for every 1,000 of net amount at risk (death benefit face minus CV). This is because the term life component of all UL products is not level premium term, but annually increasing term rates. So, 4% returns may not be enough to cover unless you can keep increasing funding to replace more & more of the net amount at risk being charged for. If you have any lump sums in any after tax accounts like bank accounts, dropping those funds in as allowed can help replace the net amount at risk insurance. Downside is every premium payment is likely having a 4-6.5% load fee deducted before it gets into the cash value.

Great work managing your policy so far

 

[f55c6]

Awesome. Great that you fully understand & are paying so close attention. That is very rare in my experience. Likely a good move that you changed to level, especially if you have so much in fixed account. I have alot of old fixed account UL & Annuities guaranteeing 4-4.5%. the risk you have with so much in fixed though, is that as you age, the internal cost of insurance will escalate as you age for every 1,000 of net amount at risk (death benefit face minus CV). This is because the term life component of all UL products is not level premium term, but annually increasing term rates. So, 4% returns may not be enough to cover unless you can keep increasing funding to replace more & more of the net amount at risk being charged for. If you have any lump sums in any after tax accounts like bank accounts, dropping those funds in as allowed can help replace the net amount at risk insurance. Downside is every premium payment is likely having a 4-6.5% load fee deducted before it gets into the cash value.

Great work managing your policy so far

Thank you. You're correct as that's exactly what my agent related at the time. I have 5 sub accounts that I'm still overfunding on a monthly basis with a fixed premium. This more than covers the current increasing term by 50%. I also make a separate monthly payment on-line every month. I am concerned with the increasing term amount in the years to come as the projections depict a rapidly increasing COI during my mid to late 70's. I look at my quarterly statements and clearly see the monthly cost of insurance fluctuate with the market performance (amount at risk). The premium taxes are 3.25% of every premium and the annual contract charge is $84. The fund charges, separate account charges, and total investment division charges equate to total weighted investment charges of 1.26%. The VUL was probably was not a good fit for what I needed at the time. However, there is a good chunk of money accumulated. It's basically another pot of money and I'm okay with having an asset that I really don't need. It's definitely better than the other way around. Need money that I don't have.

 

[Allen Trent]

Thank you. You're correct as that's exactly what my agent related at the time. I have 5 sub accounts that I'm still overfunding on a monthly basis with a fixed premium. This more than covers the current increasing term by 50%. I also make a separate monthly payment on-line every month. I am concerned with the increasing term amount in the years to come as the projections depict a rapidly increasing COI during my mid to late 70's. I look at my quarterly statements and clearly see the monthly cost of insurance fluctuate with the market performance (amount at risk). The premium taxes are 3.25% of every premium and the annual contract charge is $84. The fund charges, separate account charges, and total investment division charges equate to total weighted investment charges of 1.26%. The VUL was probably was not a good fit for what I needed at the time. However, there is a good chunk of money accumulated. It's basically another pot of money and I'm okay with having an asset that I really don't need. It's definitely better than the other way around. Need money that I don't have.

One thing you may want to look at if the insurance is secondary to the growth is to possibly look to 1035 exchange (rollovers) the current policy to a new VUL or IUL if you are still insurable. A year ago I would have never said this, but the laws changed from a covid Bill & changed the IRS premium room laws for the 1st time since 1988. So, it may be possible that you could get a smaller face policy today that would fit all your current cash value & the premiums you want to pay. Thus, having more cash in smaller policy, meaning less net amount at risk, meaning less term costs, meaning more growth.

Maybe your agent can check it out & compare. May or May not work for you, but worth checking based on everything you are saying

 

[Lloyds of Lubbock]

It certainly can't hurt to look but
1. New surrender charges
2.1035 money subject to sales charges
3. New contestable period.
4. Guaranteed rates in the fixed account may be lower.
5. New commissions paid.
Maybe see if your carrier has an exchange program.
Squash the face amount to minimum non mec and see how it effects your COI's

 

[ernadrey11]

When you take out a loan, banks often offer to buy insurance along with the loan. Sometimes, even more than one. These insurances are supposed to help you cope with the loan if you get into trouble and protect the bank from losses. The law allows the bank to require that the borrower insure the property that is the collateral for the, loan-usually a home or a car. If a person doesn't want to take out such insurance, the bank has the right to deny him the loan money. But I could be wrong, so you should consult Mortgage Broker Taunton. These issues require a lot of attention, so you should look into all the additional nuances of insurance.