Can a Non-HNW individual obtain any value from a LIRP?

[DHK]

There are multiple ways to use collateral.

Only with whole life insurance will the lender guarantee the performance of the asset they are lending against.

That's not possible with real estate with either a conventional 1st mortgage, reverse mortgage, or commercial mortgage. Of course a conventional 1st mortgage and commercial mortgages on a business require payments.

A margin loan could possibly be used, but only against eligible securities and can be subject to a margin call if the value of those securities falls below acceptable levels with the loan against it.

Regarding loan interest being paid back to you - I never make that claim. Paying loan interest on a life policy is just like paying any interest on any other bank loan (although unstructured and favorable terms) while you also happen to own stock in that bank that pays dividends. Too many times it's conflated and I don't think its right or a proper representation of whole life insurance... but it's done all the time.

With IUL, even a "no cost wash loan" (borrow at 2% fixed cost while the collateralized portion earns 2% to "wash out") you lose out on indexed earnings on the collateralized portion of the policy.

I've heard that Ameritus IUL doesn't do that, but I haven't verified. Even if they do, the insurance company must always be made whole. When there's a great deal, something else has to give. So if it's true, it may not perform nearly as well as other companies that don't offer that.

There's always a cost somewhere with any policy being used for lending purposes.

 

[DHK]

Regarding a 401(k) loan - it's not possible in retirement. Once you separate from service, you cannot get a loan against your plan as it is subject to repayment from one's income from the same company (ie. working).

 

[scagnt83]

Regarding loan interest being paid back to you - I never make that claim. Paying loan interest on a life policy is just like paying any interest on any other bank loan (although unstructured and favorable terms) while you also happen to own stock in that bank that pays dividends. Too many times it's conflated and I don't think its right or a proper representation of whole life insurance... but it's done all the time.

The Ledger in the WL illustration would disagree.

 

[DHK]

The ledger can predict whatever it wants. I'll stick to what is said in Tools and Techniques of Life Insurance Planning.

Why does the insurer charge interest on an advance of money that will someday be paid to the policyowner? Because the insurer’s statement of what policy values will be year after year is based on the assumption that the insurer will have a reserve (i.e., an amount in excess of that needed to pay for the current year’s costs) to invest and earn interest so that the insurer can keep its future contractual promises. If premiums unused for costs in early years are not on hand, the insurer cannot invest that money and pay the amounts promised in the future. The charge made to policyowners who accept these advances puts the insurer back where it would have been had it been able to invest the money. (In fact the interest rate may be somewhat higher than the amount assumed by the insurer in calculating policy loan values because the insurer needs to pay for administrative costs in making, keeping track of, and repaying these loans and, to some extent, to create a disincentive to borrowing.)

 

[scagnt83]

The ledger can predict whatever it wants. I'll stick to what is said in Tools and Techniques of Life Insurance Planning.

The only prediction in a Ledger is the Dividend Rate. The rest are Facts.

When the Loan is repaid, the Accrued Interest is paid back into the Policy and is reflected in the Cash Value.

 

[Dave G]

"When the Loan is repaid, the Accrued Interest is paid back into the Policy and is reflected in the Cash Value."

OK, but who would pay back $2,177,919 in a policy loan at age 85 in the 50th policy year? Let's get real.

Leveraged life insurance has been around for decades...back in day it was called "Minimum Deposit." No matter the name you hang on it, it's still a risky strategy with a lot of downstream risk, on policyowner and agent alike if/when it implodes. What folks miss is all that "tax-free" income via policy loans is a ticking time bomb, waiting to come home to roost as fully taxable income when the policy goes upside down. It takes years of care by the agent and/or other financial advisors to keep the thing going. It can go south for any number of reasons: Planned premiums aren't paid or reduced; the policy lapses; the cost of insurance exceeds the cash value and dropped; it's cashed-in by the insured or on advice of an unsuspecting family member. Unless there is a death benefit that ultimately gets paid, you pay tax on everything else above cost-basis.

If you're the agent, you DO NOT want to be around when this happens. Lawyers will be calling.

There are too many other good reasons and ways to own and fund cash-value life insurance. It doesn't need to be dressed up into something it's not.

 

[scagnt83]

"When the Loan is repaid, the Accrued Interest is paid back into the Policy and is reflected in the Cash Value."

OK, but who would pay back $2,177,919 in a policy loan at age 85 in the 50th policy year? Let's get real.

Its an example that easily shows how the repayments work.

The numbers work the same for a single Loan paid back over 10 years.

But to answer your question:
- Someone who Premium Financed a WL Policy.
- Someone who used the policy to fund a Business Exit Strategy and wants to make it whole for Premium Recapture.
- Someone who used it for income, and now wants to reposition assets to maximize their legacy

 

[scagnt83]

Leveraged life insurance has been around for decades...back in day it was called "Minimum Deposit." No matter the name you hang on it, it's still a risky strategy with a lot of downstream risk, on policyowner and agent alike if/when it implodes. What folks miss is all that "tax-free" income via policy loans is a ticking time bomb, waiting to come home to roost as fully taxable income when the policy goes upside down. It takes years of care by the agent and/or other financial advisors to keep the thing going. It can go south for any number of reasons: Planned premiums aren't paid or reduced; the policy lapses; the cost of insurance exceeds the cash value and dropped; it's cashed-in by the insured or on advice of an unsuspecting family member. Unless there is a death benefit that ultimately gets paid, you pay tax on everything else above cost-basis.

If you're the agent, you DO NOT want to be around when this happens. Lawyers will be calling.

There are too many other good reasons and ways to own and fund cash-value life insurance. It doesn't need to be dressed up into something it's not.

I was speaking from a purely technical standpoint.

Im not dressing anything up.

Im not even saying one should utilize Life Insurance for income purposes or as an "asset".

Im stating facts about how the product works.

Accrued Interest on WL Loans, when paid back, goes into the Cash Value of the policy and is reflected there dollar for dollar.

 

[scagnt83]

Leveraged life insurance has been around for decades...back in day it was called "Minimum Deposit." No matter the name you hang on it, it's still a risky strategy with a lot of downstream risk, on policyowner and agent alike if/when it implodes. What folks miss is all that "tax-free" income via policy loans is a ticking time bomb, waiting to come home to roost as fully taxable income when the policy goes upside down. It takes years of care by the agent and/or other financial advisors to keep the thing going. It can go south for any number of reasons: Planned premiums aren't paid or reduced; the policy lapses; the cost of insurance exceeds the cash value and dropped; it's cashed-in by the insured or on advice of an unsuspecting family member. Unless there is a death benefit that ultimately gets paid, you pay tax on everything else above cost-basis.

If you're the agent, you DO NOT want to be around when this happens. Lawyers will be calling.

You are talking about Phantom taxes on Loans if the Policy Lapses.

If that is your only reason to not utilize Life Insurance Loans. Get real.

Any distribution plan requires monitoring to avoid negative outcomes.

Modern Life Insurance product have been designed to avoid this situation. Have you tried to OverLoan a WL lately on an illustration system? Most carriers will not issue Loans that would cause a Lapse on a WL. And most IULs have the Overloan protection Riders (untested by courts, but its there).

It should certainly be an awareness for both Advisor and their Client. But the doom and gloom you paint is not realistic to that extent when selling modern products.

Again, not even speaking about the validity of the concept. Purely technically speaking, your concern is a minimal issue in modern times.

 

[Allen Trent]

I was speaking from a purely technical standpoint.

Im not dressing anything up.

Im not even saying one should utilize Life Insurance for income purposes or as an "asset".

Im stating facts about how the product works.

Accrued Interest on WL Loans, when paid back, goes into the Cash Value of the policy and is reflected there dollar for dollar.

So, here me out.

If 2 identical age people buy the exact same policy with same exact premiums for say 30 years & then 1 takes out a 100k loan & the other doesn't take a loan. 24 years later if the person that took the loan pays off that 400k loan, are you saying the person that took the loan & was charged 300k in interest will have more cash value than the one that didn't take the loan?

If not, why not? If the accrued interest is paid back & fully reflected in the case value, wouldn't this be the case.

I know this isn't the case, but having trouble following how a person repaying the insurance carrier back would get the benefit of the accrued interest that compounded.

Instead, I think it is merely reflected that the lender reflects it by removing the collateral attached to the cash value & death benefit. But, the person is not directly benefitting by having a 100k loan turn into a 400k loan balance