Free Loans on Death Benefit?

[Agent01]

Today, a WFG agent was attempting to sell a Western Reserve Life Freedom Global Indexed Universal Life Insurance to me.

They explained that the cash value is basically my money and is for me to withdraw whenever I pleased. However, they also explained that I am able to obtain free loans that I would not have to pay back from the death benefit amount.

That doesn't make any sense to me as to why such a thing would be possible. Western Reserve Life requires their participants to pay 30 years for their policy from what I am aware of. If one's policy is costing them $150 a month, in 30 years, their cumulative contribution would have a total of $54,000.

The death benefit that the agent has illustrated has a value of roughly $450,000.

My question is, if one is allowed to obtain free loans on the death benefit and does not have to pay it back (which is what was told to me from the agent), why would one not just obtain a loan from the death benefit and just allocate those funds to pay for the policy if the only effect would result in decreasing the death benefit amount (which is what was also told from the agent).

Please help if you have any knowledge of free loans (that you don't have to pay back) on IULs.

 

[scagnt83]

Today, a WFG agent was attempting to sell a Western Reserve Life Freedom Global Indexed Universal Life Insurance to me.

They explained that the cash value is basically my money and is for me to withdraw whenever I pleased. However, they also explained that I am able to obtain free loans that I would not have to pay back from the death benefit amount.

That doesn't make any sense to me as to why such a thing would be possible. Western Reserve Life requires their participants to pay 30 years for their policy from what I am aware of. If one's policy is costing them $150 a month, in 30 years, their cumulative contribution would have a total of $54,000.

The death benefit that the agent has illustrated has a value of roughly $450,000.

My question is, if one is allowed to obtain free loans on the death benefit and does not have to pay it back (which is what was told to me from the agent), why would one not just obtain a loan from the death benefit and just allocate those funds to pay for the policy if the only effect would result in decreasing the death benefit amount (which is what was also told from the agent).

Please help if you have any knowledge of free loans (that you don't have to pay back) on IULs.

Find another agent. He is absolutely wrong.


A loan on an IUL is not from the Death Benefit (DB), it is from the Cash Value (CV).

Technically, the CV is used as "collateral" for the Policy Loan. So it you take out a $10k Loan, $10k of the CV is used as Collateral.

That Collateralized amount, has an interest rate charged against it for the Loan. This Loan/Interest does not have to be paid back out of pocket, but it will deduct from BOTH the CV & DB of the policy.

Now, most IUL policies also allow the Collateralized amount to either participate in Indexed Gains, or receive a set positive interest rate.

The reason the agent says "it doesnt cost you anything" is because they offer what is called a "wash loan".
This means that they Credit you the same % that they charge for the Loan.
So if they charged 5%/y for the Loan, they would give the Collateralized amount a 5%/y gain to create a net 0% Loan.


Many companies offer you the chance to create a positive arbitrage with your Loaned CV. In addition to the "Wash Loan", they offer a "Participating Loan" that receives the same Index gain as the rest of the policy. So if they charge you 5% but your index gains are 8%, then you have made 3% on your loaned money.


The fact that your agent thinks the loan is from the DB is a big red flag that they are very inexperienced. That is a very bad thing with Cash Value Life Insurance.
It might seem like a small mistake to you, but it is not. If they dont know the most basic facts about how the policy works, how much of the more complicated stuff will they not know??? It is extremely easy to screw up an IUL Policy.....


Also, $450k seems like a VERY high DB for a $150/m Premium. How old are you?

When you are using Life Insurance for Cash Value purposes, you want the lowest DB possible for the Premium you contribute.
The reason for this is that the lower the DB, the lower the internal "cost of insurance" is, or in otherwords, less premium is needed to pay for the DB.
And less premium going to the DB, means MORE premium going to the CV, which means higher CV growth.


You need to find an agent who knows what they are doing if you want an IUL policy for CV growth. If the policy gets screwed up you could be out money... or owe a large tax bill to the IRS...

 

[Agent01]

Thank you very much. I will keep in mind those red flags.

Also, if loans are on the cash value side, what exactly are withdrawals because from what I understood from that agent:

Withdrawals: Cash Value
Loans: Death Benefit


They have introduced the wash loan as well. However, the way the explained it was that by law, loans cannot be tax free. So if one was to obtain a loan (again from the DB) the company would tax it for 2.25% and then the following year, the company would then return that 2.25% tax that was deducted back into the death benefit.

As for the illustration, the numbers I provided may be wrong. I'm not sure the actual illustrations are at the moment.

Another question:
WRL grants a 1% floor, 13% cap. The agent said that since the money that I contribute is not directly participated in the market and is only participating with the index, that is how the 1% floor is granted. My question is, if the money is not directly invested into the market, then how are the companies them self making their money?