It's actually easy (but foolish) to get into this position. I think this is what the original reference was for:
- You withdraw the money that you deposited into the policy
- You borrow against the cash value (say $50K)
- You then try to do a 1035 exchange. You now have a $50K taxable event, to cover the loan which could be now treated as a distribution.
The best way around this is:
- Don't do the exchange. I mean, really, you have a loan out against it, why bother? Okay, somebody might have a good reason...
- If you want to do the exchange, you pay off the loan (cut a check to the insurance company)
Now, I'm not a 1035 exchange expert, but I'm pretty sure you can't pull it off if there is a loan on the policy.
I don't believe this had anything to do with terminating the policy itself, it had to do with changing them, and doing an exchange. Not 100% sure on this, but that's how I read angwagner1974 post.
Dan
