Does this Make Sense

[Deepsea]

I was looking at different scenarios.....does this make sense.

I learned or was shown that in order to maximize retirement income out of a whole life policy, that you should first take out basis and then loans.

However I realize that this strategedy actually reduces death benefit faster and reduces cash value more than just taking loans.

Assuming you have had to compound say 20 years in a limited pay policy.....it would seem that the better maximization strategedy would be to just take loans, rather than surrender basis.

Thoughts ?

 

[meclimit]

I was looking at different scenarios.....does this make sense.

I learned or was shown that in order to maximize retirement income out of a whole life policy, that you should first take out basis and then loans.

However I realize that this strategedy actually reduces death benefit faster and reduces cash value more than just taking loans.

Assuming you have had to compound say 20 years in a limited pay policy.....it would seem that the better maximization strategedy would be to just take loans, rather than surrender basis.

Thoughts ?

Compare an in-force illustration showing surrenders to basis and compare it to taking the same amount as loans. The right answer depends on whether the policy loan rate is variable or fixed, whether the company is direct or non-direct recognition, and what you expect loan/dividend rates to do in the future.

For variable loan rate/non-direct recognition policies, surrenders to basis is no longer preferred -- primarily because taking loans currently illustrates better. But it illustrates better because the loan interest rate is lower than the combined crediting rate on the policy (including dividends). BUT YOU HAVE TO MONITOR THE LOANS AND LOAN INTEREST RATE CAREFULLY. If, at some point, the loan interest rate exceeds the combined crediting rate, then consider a surrender to basis to both pay off the loan balance and to take money out of the policy.

 

[WMG]

I was looking at different scenarios.....does this make sense.

I learned or was shown that in order to maximize retirement income out of a whole life policy, that you should first take out basis and then loans.

However I realize that this strategedy actually reduces death benefit faster and reduces cash value more than just taking loans.

Assuming you have had to compound say 20 years in a limited pay policy.....it would seem that the better maximization strategedy would be to just take loans, rather than surrender basis.

Thoughts ?

The only way to answer your question is to look at actual inforce illustrations, for several different scenarios, as well as, then, de-couple the illustrations (with changes in the dividend rate; and the loan interest rate as well if possible).

meclimit is correct in that it will absolutely depend on the loan rate -- fixed or variable, and many change at a certain point in time. Also, direct vs. non-direct recognition is critical as well.

That said, the illustrations are simply a snapshot -- in time -- and are meaningless. They are simply a reference for the future based upon today. You have to run the illustrations at the time you are going to select, and then monitor, review, etc. the policies, and run new inforce illustrations annually. I run illustrations like this regularly, for policies I have under management with NY Life, Mass Mutual, Guardian, and others as well. Many professionals truly don't understand that policies need to be "managed" -- actively -- and that they require administration.

Good luck.

 

[scagnt83]

I was looking at different scenarios.....does this make sense.

I learned or was shown that in order to maximize retirement income out of a whole life policy, that you should first take out basis and then loans.

However I realize that this strategedy actually reduces death benefit faster and reduces cash value more than just taking loans.

Assuming you have had to compound say 20 years in a limited pay policy.....it would seem that the better maximization strategedy would be to just take loans, rather than surrender basis.

Thoughts ?

Generally speaking just Loans usually maximizes the income. Especially if it is a NDR loan.

Most career agents at the big mutuals are taught to take withdrawals up to basis first, and then do loans. This is to minimize the potential tax liability if the policy crashes/lapses.

This is why I like IUL for income purposes. The overloan rider goes a long way in taking away the risk of a tax time bomb in retirement.

 

[BNTRS]

As others have stated NDR contracts with a positive spread div minus loan should produce more income/better benefit if loans only. Since NDR contracts tend to track dividends to loan interest to some degree (though not always apparent) loans only should be the more favorable approach long term.

There is one extremely important additional consideration with respect to this at least in determining a possible positive spread and that is when interest is charged. If interest is charged in advance, then you have dis-equal timing between compounding of loan interest and dividends (loans compound at the beginning of the period while dividends at the end of the period). This will dramatically increase the cost of borrowing vis-a-vis a spread consideration and could then favor withdrawal to basis.

Direct recognition contracts will depend on loan rates and provisions.

Illustrations can sometimes overstate the impact of loans on a policy, so be careful.

 

[Deepsea]

Thanks for the input