Banks that will pay off loans on policies

[JFBAgent]

Anyone have any experience with banks that will pay off loans on policies and accept some death benefit as collateral for lending the cash to do this? Have a client that has several whole life policies with USAA and Northwestern Mutual.

 

[fed up]

Don't think you will find a bank willing to take the risk since the insured could stop paying on the policy and then the bank becomes the owner of a policy with little value. You have a client who has tapped his Life policies and can't pay back the loans and now wants a bank to give him money which he has shown he won't pay back

 

[Lloyds of Lubbock]

I dont think banks will accept part of the death benefit as collateral.
There are many third party lenders, Valley National, KFA, Dollar Bank to name a few.
The cash value of the policy is collateral for the loan.
If the client stops paying premium and the cash value is no longer adequate as collateral, the lender has the right to cash in the policy and use the proceeds to pay back the loan.
The balance if any would go the the policy owner.

 

[adjusterjack]

I think there are investors or investment companies that buy the policy, become the beneficiary, pay back the loan, then wait until the death of the insured.

More information in these search results:

investors that buy life insurance policies at DuckDuckGo

 

[Lloyds of Lubbock]

I dont think he is looking for a life settlement....but maybe should explore it

 

[JFBAgent]

Thank you for the replies. It’s a paid up policy with no premiums due for some years. Just that the loan repayment will have to commence soon so as to avoid a lapse and the taxable consequence it creates.

 

[Allen Trent]

Thank you for the replies. It’s a paid up policy with no premiums due for some years. Just that the loan repayment will have to commence soon so as to avoid a lapse and the taxable consequence it creates.

That is not good. No loan even possible if there is no CV & doubt it could even be sold to buyers of existing life policies in that shape.

If paid up, is the annual dividend enough to cover the interest on the loan or more?

Is there possibly any PUAR cash values? I have seen some messed up policies that got screwed up by client and/or agent that had loans against base CV compounding or borrowing to pay premiums where there was PUAR values sitting there that could have been used to pay premiums or pay toward loans, etc

Before the CV goes to zero, see if the policy can be 1035 exchanged to a NQ annuity. Maybe that could avoid the tax bomb in that policy. Note- the loan would likely be extinguished when 1035 happens, so it could still have a tax issue if the extinguished loan exceeds cost basis.

Lastly, client may want to see about a home equity loan to pay this off. I normally don't love this idea, but in this case it may be better due to the tax issue. Whether he makes payments to a bank on a home loan, a bank on a personal loan, etc doesnt matter. Low interest bank money to pay off likely 7%l ife policy loan would make better math sense. Plus, if the policy is a direct recognition contract, his annual dividend would jump with the life loan gone

Sorry for ramblings, typing on phone as I think up possible fixes

 

[JFBAgent]

Thank you Allen. It’s def a case of client screwing it all up. Could have taken accumulated dividends but took loan instead and didn’t look at the long term ramifications of borrowing against policies. One has 91% loan ratio and one has 40%. Latter is viable until death without lapse.

Policies performed well so the cost basis is below cash value and would have taxes due on transfer. Shame he touched them at all...should have taken out a personal loan instead for the home remodels.

client is placing home in trust as he shares it with his partner so that would screw everything up.

 

[Allen Trent]

Policies performed well so the cost basis is below cash value

With such high loan amounts, the policies may not have gained as much as you think. Taxable gain on life policies is more than just cash value minus payments. Every penny of interest charged also counts Gained the client in the equation of figuring out the taxable gain because the IRS considers the client to hagd not only received the distributions but also the loan interest charged. Other riders to the policy also don't count in the equation of the adjusted cost basis as many term or spousal riders costs are deducted & not included in the basis.

PS. Dividend accumulations is an entirely different dividend option than is paid up additions. Dividend accumulations are more of a bank savings account of taxable annual interest whereas paid up additions of the dividends is like buying single premium add ons to the policy each year.

Is there any paid up additions values on the 40% policy? If so & the policy is not a MEC, maybe he could surrender paid up additions from that policy to pay down the loan on the 91% policy that likeky has the ticking tax bomb building.

 

[Lloyds of Lubbock]

I dont know the loan rate of the policy but a 3rd party lende may offer your client a lower interest rate.
This way you keep the policy inforce.
Also consider lowering the face amount and release some additions to pay loan