Suggestions for Client who Can't Pay Back Outstanding Loan

[yogooglethis]

Client is 71 yr old F smoker who can pass any FE underwriting and has 5,000 policy with AGL at 23.92 premium with 1,1135.00 loan @ 8% that she can't pay back. Policy still has 1,608.22 CV. I don't think AGL would reduce face but she is not happy with her agent so I maybe have an opportunity if I can improve situation.She also has another 5k AGL policy at 25.37 with 1,373.00 CV

She only wants 10k total DB and is mainly concerned about keeping premium the same or lower @ about 50.00 monthly.She has been my med supp customer for years so getting the deal done is not a problem I just want to make sure I am helping her.

First is there any FE carriers that 1035 exchange? I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV. She said she would be happy with that and i could have done the deal yesterday but I am not sure about it.

Is their a scenario were she is better off keeping the AGL if she doesn't intend on repaying loan?

 

[jdeasy]

Client is 71 yr old F smoker who can pass any FE underwriting and has 5,000 policy with AGL at 23.92 premium with 1,1135.00 loan @ 8% that she can't pay back. Policy still has 1,608.22 CV. I don't think AGL would reduce face but she is not happy with her agent so I maybe have an opportunity if I can improve situation.She also has another 5k AGL policy at 25.37 with 1,373.00 CV

She only wants 10k total DB and is mainly concerned about keeping premium the same or lower @ about 50.00 monthly.She has been my med supp customer for years so getting the deal done is not a problem I just want to make sure I am helping her.

First is there any FE carriers that 1035 exchange? I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV. She said she would be happy with that and i could have done the deal yesterday but I am not sure about it.

Is their a scenario were she is better off keeping the AGL if she doesn't intend on repaying loan?

Looks like in Florida the best deal for $10,000 is Americo at about $66/mo. She would walk with about $1900 cash and have a $10,000 policy.

That $1900 would pay that $16/mo premium difference for 118 months. Almost 10 years.

Or you could look at RPU on the 2 policies and then sell her one policy to make up the difference to $10,000.

 

[readsit1st]

Looks like in Florida the best deal for $10,000 is Americo at about $66/mo. She would walk with about $1900 cash and have a $10,000 policy.

That $1900 would pay that $16/mo premium difference for 118 months. Almost 10 years.

Or you could look at RPU on the 2 policies and then sell her one policy to make up the difference to $10,000.

How much would an Americo SPWL give her fo the $1900, and how much would that reduce the $66 ?

 

[WinoBlues]

Sounds like you are looking for best for your client.

Two assumptions on my part. She does not need the cash values otherwise they would already be gone. The old policies are non contestible and new ones would be.

Opt1) Leave the non loaned one alone. RdPup the loaned one for say $2,000 +- and sell her $3,000 United Heritage policy @ $20. She saves $4.00 a month and if she dies next month the beneficiary receives the $7,000.00 benefit asap. and the balance in 90 days +-. If she dies after the two years the bene gets $3,000.00 with in a few days and the $7,000 in a few weeks.

Opt2) "" I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV.""

Disclaimer: I am not an FE agent.

 

[TDFnCali]

Sounds like you are looking for best for your client.

Two assumptions on my part. She does not need the cash values otherwise they would already be gone. The old policies are non contestible and new ones would be.

Opt1) Leave the non loaned one alone. RdPup the loaned one for say $2,000 +- and sell her $3,000 United Heritage policy @ $20. She saves $4.00 a month and if she dies next month the beneficiary receives the $7,000.00 benefit asap. and the balance in 90 days +-. If she dies after the two years the bene gets $3,000.00 with in a few days and the $7,000 in a few weeks.

Opt2) "" I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV.""

Disclaimer: I am not a Licensed Life agent.

I edited your last comment to reflect the real truth!

 

[WinoBlues]

I edited your last comment to reflect the real truth!

Who told?



........

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I edited your last comment to reflect the real truth!

Who told?



........

 

[SoCalAdvisor]

Client is 71 yr old F smoker who can pass any FE underwriting and has 5,000 policy with AGL at 23.92 premium with 1,1135.00 loan @ 8% that she can't pay back. Policy still has 1,608.22 CV. I don't think AGL would reduce face but she is not happy with her agent so I maybe have an opportunity if I can improve situation.She also has another 5k AGL policy at 25.37 with 1,373.00 CV

She only wants 10k total DB and is mainly concerned about keeping premium the same or lower @ about 50.00 monthly.She has been my med supp customer for years so getting the deal done is not a problem I just want to make sure I am helping her.



First is there any FE carriers that 1035 exchange? I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV. She said she would be happy with that and i could have done the deal yesterday but I am not sure about it.

Is their a scenario were she is better off keeping the AGL if she doesn't intend on repaying loan?

I am only going to address the 1035 Exchange portion of your question. Hopefully this will help you to better understand the characteristics of life insurance. All life insurance companies accept 1035 Exchanges, ie; an exchange for a "like for like" property. There are 4 applicable strategies which I have listed below and the possible tax consequences associated with the transaction. After reading, you should be able to make an informed decision on which is best for your client.

Pay Off the Loan with Out-Of-Pocket Money Before the Exchange
The simplest way for your client to handle an outstanding policy loan is to simply pay the money back. Since the borrowed money is returned, the loan won’t count as a deemed distribution. This means the loan won’t cause your client to owe any income taxes when she makes an exchange. To repay the loan, the owner can use personal funds, or even use a loan obtained from another life insurance policy.

If cash flow is an issue, there is nothing preventing the client from paying off the loan, doing the exchange and then borrowing from the new policy. Just make sure the policy isn’t a modified endowment contract (MEC) as this could lead to tax issues if the client later taps into the policy cash values.
Surrender the Policy
Your client can also end her outstanding loan by surrendering her policy. An outstanding policy loan is typically treated as the amount distributed if a policy lapses or is surrendered. The owner won’t have to repay the outstanding loan and will also receive any cash value that is remaining in her insurance policy. But remember, this option may cause adverse tax consequences. Whether your client will owe taxes depends on the basis of the policy. The life insurance basis is the value of all premiums paid by your client. If she receives more in cash value (from the loan and the remaining cash value) than she paid in premiums, her gains are taxable income. They will be taxed at her income tax rate, not her capital gains tax rate.
Carryover of the Loan into the New Policy

Your client might also have the option to transfer her loan to her new life insurance policy, known as "mirroring" the loan. Not all life insurance companies accept mirrored loans, so check with the new insurance company before considering this option. If the insurance company accepts mirrored loans, the loan will directly transfer to the new policy. Your client will continue to defer the gains in her life insurance and won’t owe any taxable income as a result of the exchange. The basis in the new policy will be the basis of her old policy plus any extra premiums paid for the new policy.
Use Policy Values to Pay Off the Loan
One last way for your client to handle an outstanding life insurance loan is to pay off the loan with current life insurance cash values through a partial surrender at the time of the exchange or just prior to it. Since the loan is being paid straight out of the insurance cash values, your client won’t have any out-of-pocket expense. However, if there is gain in the policy, the elimination of the loan will result in taxable income (a deemed distribution otherwise known as “boot”) for the entire amount of the built-in gain, which is taxable at ordinary income tax rates.This makes this decision more attractive if your client does not have any built-in gains in her cash value as she won’t owe any income taxes. When your client chooses this option as part of a 1035 exchange, the timing becomes very important. In Private Letter Ruling 9141025, the IRS held that using life insurance cash value to pay off an outstanding loan creates taxable “boot” income if it is part of a 1035 exchange. This means your client would owe income tax on the amount of the surrendered loan. Even if your client completes the surrender and the exchange at different times, she might still owe taxes. In the past, the IRS has viewed withdrawals and exchanges that occurred too close together as step transactions, meaning that even though they were at different times, both moves were considered the same transaction.
In order for a partial surrender to not count as boot income, the IRS stated that it could not occur “shortly before or shortly after” a 1035 exchange. Unfortunately, the IRS has not defined what a short period is in this case, so handling this issue can be tricky. In the past, the IRS has been most concerned about partial surrenders that happen right before a 1035 exchange. If your client wants to make a partial surrender before making an exchange, she should, at a minimum, leave a period of several months between the two transactions.
The IRS seems less concerned about loan surrenders after a 1035 exchange, even those that have happened right after an exchange. In another Private Letter Ruling, PLR 8816015, the IRS decided that using cash values in a new insurance policy to pay off a loan carried over from a 1035 exchange did not create boot income. Despite this ruling, it would still be a good idea for your clients to wait a reasonable amount of time before paying off their outstanding loan from their new policy.
Handling the exchange or surrender of a life insurance policy can get tricky, especially when your client has an outstanding policy loan. Make sure to get the right life insurance advice beforehand so you and your clients can take advantage of all possible tax advantages.

 

[WinoBlues]

I understand what you are saying. However, reread the OP's first sentence and notice wish forum you are in.

I am only going to address the 1035 Exchange portion of your question. Hopefully this will help you to better understand the characteristics of life insurance. All life insurance companies accept 1035 Exchanges, ie; an exchange for a "like for like" property. There are 4 applicable strategies which I have listed below and the possible tax consequences associated with the transaction. After reading, you should be able to make an informed decision on which is best for your client.

Pay Off the Loan with Out-Of-Pocket Money Before the Exchange
The simplest way for your client to handle an outstanding policy loan is to simply pay the money back. Since the borrowed money is returned, the loan won’t count as a deemed distribution. This means the loan won’t cause your client to owe any income taxes when she makes an exchange. To repay the loan, the owner can use personal funds, or even use a loan obtained from another life insurance policy.

If cash flow is an issue, there is nothing preventing the client from paying off the loan, doing the exchange and then borrowing from the new policy. Just make sure the policy isn’t a modified endowment contract (MEC) as this could lead to tax issues if the client later taps into the policy cash values.
Surrender the Policy
Your client can also end her outstanding loan by surrendering her policy. An outstanding policy loan is typically treated as the amount distributed if a policy lapses or is surrendered. The owner won’t have to repay the outstanding loan and will also receive any cash value that is remaining in her insurance policy. But remember, this option may cause adverse tax consequences. Whether your client will owe taxes depends on the basis of the policy. The life insurance basis is the value of all premiums paid by your client. If she receives more in cash value (from the loan and the remaining cash value) than she paid in premiums, her gains are taxable income. They will be taxed at her income tax rate, not her capital gains tax rate.
Carryover of the Loan into the New Policy

Your client might also have the option to transfer her loan to her new life insurance policy, known as "mirroring" the loan. Not all life insurance companies accept mirrored loans, so check with the new insurance company before considering this option. If the insurance company accepts mirrored loans, the loan will directly transfer to the new policy. Your client will continue to defer the gains in her life insurance and won’t owe any taxable income as a result of the exchange. The basis in the new policy will be the basis of her old policy plus any extra premiums paid for the new policy.
Use Policy Values to Pay Off the Loan
One last way for your client to handle an outstanding life insurance loan is to pay off the loan with current life insurance cash values through a partial surrender at the time of the exchange or just prior to it. Since the loan is being paid straight out of the insurance cash values, your client won’t have any out-of-pocket expense. However, if there is gain in the policy, the elimination of the loan will result in taxable income (a deemed distribution otherwise known as “boot”) for the entire amount of the built-in gain, which is taxable at ordinary income tax rates.This makes this decision more attractive if your client does not have any built-in gains in her cash value as she won’t owe any income taxes. When your client chooses this option as part of a 1035 exchange, the timing becomes very important. In Private Letter Ruling 9141025, the IRS held that using life insurance cash value to pay off an outstanding loan creates taxable “boot” income if it is part of a 1035 exchange. This means your client would owe income tax on the amount of the surrendered loan. Even if your client completes the surrender and the exchange at different times, she might still owe taxes. In the past, the IRS has viewed withdrawals and exchanges that occurred too close together as step transactions, meaning that even though they were at different times, both moves were considered the same transaction.
In order for a partial surrender to not count as boot income, the IRS stated that it could not occur “shortly before or shortly after” a 1035 exchange. Unfortunately, the IRS has not defined what a short period is in this case, so handling this issue can be tricky. In the past, the IRS has been most concerned about partial surrenders that happen right before a 1035 exchange. If your client wants to make a partial surrender before making an exchange, she should, at a minimum, leave a period of several months between the two transactions.
The IRS seems less concerned about loan surrenders after a 1035 exchange, even those that have happened right after an exchange. In another Private Letter Ruling, PLR 8816015, the IRS decided that using cash values in a new insurance policy to pay off a loan carried over from a 1035 exchange did not create boot income. Despite this ruling, it would still be a good idea for your clients to wait a reasonable amount of time before paying off their outstanding loan from their new policy.
Handling the exchange or surrender of a life insurance policy can get tricky, especially when your client has an outstanding policy loan. Make sure to get the right life insurance advice beforehand so you and your clients can take advantage of all possible tax advantages.

 

[SoCalAdvisor]

Yeah, I was addressing his last 2 paragraphs concerning suitability, which read....

First is there any FE carriers that 1035 exchange? I was thinking I could replace her 5k policy (with the 1,135.00 outstanding loan) with a new 5k policy for 37.27 ( without doing a 1035) and then she would cash in that policy for the remaining CV. She said she would be happy with that and i could have done the deal yesterday but I am not sure about it.

Is their a scenario were she is better off keeping the AGL if she doesn't intend on repaying loan?

What he doesn't know, can and will hurt him. Policy owners and/or beneficiaries are increasingly litigating against agents/advisors for improper exchanges or replacements. You need to make sure you are properly documenting policy suitability and prove that you have a rational process for selecting and monitoring these life insurance policies.

 

[yogooglethis]

Looks like in Florida the best deal for $10,000 is Americo at about $66/mo. She would walk with about $1900 cash and have a $10,000 policy.

That $1900 would pay that $16/mo premium difference for 118 months. Almost 10 years.

Or you could look at RPU on the 2 policies and then sell her one policy to make up the difference to $10,000.

Yes Americo is lowest in Fl at 34.50 for 5k even a little lower than Oxford at 37.24 for 5k and 71.94 for 10k

I believe I am going to suggest just replacing the 5k but just curious if you know if AGL or any FE carrier give RPU info over phone to policyholder or do they require a written request for this info ?

Thanks for all the great input from the FE experts !