Life insurance policy on my son with an outstanding loan

[Deepsea]

Any insight is appreciated.

I own a whole life insurance policy on my son. It’s a 10 pay policy.

When I die the ownership of the policy on my son’s life, will be transferred to my son.

When I die the policy on my son will still be Inforce, but it will have a large outstanding loan.

Is my son allowed to inherit the policy as is with the outstanding loan intact, with the only difference going forward after my death is the change of ownership.

if it’s any help the policy is a Mass 10 pay.

Thanks

 

[DHK]

Yes, your son will inherit the policy as it is - unpaid loans included.

 

[Allen Trent]

Any insight is appreciated.

I own a whole life insurance policy on my son. It’s a 10 pay policy.

When I die the ownership of the policy on my son’s life, will be transferred to my son.

When I die the policy on my son will still be Inforce, but it will have a large outstanding loan.

Is my son allowed to inherit the policy as is with the outstanding loan intact, with the only difference going forward after my death is the change of ownership.

if it’s any help the policy is a Mass 10 pay.

Thanks

Does the Mass policy contractually say your son will become the owner at your death? As in, is he either listed as the contingent owner on the actual policy or does the policy application/contract language say that the insured automatically becomes the owner upon death of owner if owner is different than insured?

I ask because those scenarios above have no tax consequence when processed as part of a death claim to the contingent owner.

However, if you merely send in a change of ownership to make him the owner when he is say 18 or 25, etc or he receives the policy via probate/will, that change of ownership could trigger a 1099 for what the IRS calls transfer for value(some exceptions exist). If that transfer for value does apply, you as the assignor would owe taxes on the taxable gains in the policy at time of transfer. Your son would then get a brand new cost basis in the policy & would never owe taxes on that amount as it was reported to you when you changed ownership. Basically, you would be the assignor of policy & settle up with current taxable gain & son would be assignee & start brand new with the policy taxable gain based on that days values almost like he bought the policy from you. Also, if the cash value is over the current gift tax amount (15k) you could owe gift taxes for giving the asset during lifetime. Hopefully he is listed as contingent owner already or contractually becomes the owner by policy language that would make both the gift tax or transfer for value possible tax a non issue.

Aside from this, you could do some things to help decrease or eliminate the loan:

1. Surrender PUAR values in the policy & have them applied to the loan balance

2. Switch the annual Dividend from buying more paid up coverage to have the dividends applied to the loan balance

3. When 10 pay premium is over, continue to make the same payments but toward the loan balance

Doing this will help the policy a ton as the loan is compounding likely at 5-7% & will cause long term problems & very bad tax consequence eventually if the policy lapsed or is cashed out as all the loan interest charged is considered as gains in the taxable calculation. Plus, the Cash Value not collateralized as a loan can receive a lower dividend rate compared to the rest of the CV.

With bank loan rates so low today, you could consider getting a 3-4% bank loan today to pay off the life insurance loan. The bank loan could possibly be deducted on your tax return if you itemize deductions. Even if you can't deduct the interest, paying 3-4% lower interest on the loan is way better on than the loan on WL. Plus, a bank loan won't have long term adverse income tax consequences like a compounding loan on life insurance can if policy lapses or is surrendered.

Hopefully the agent that sold you the policy has given you these same pretty basic options with the components of the policy

 

[Deepsea]

My son is the beneficial owner in the contract upon my death.

 

[scagnt83]

My son is the beneficial owner in the contract upon my death.

No taxes on him becoming Owner.

The Loan stays on the policy and must continue to be serviced, either through policy earnings or direct loan repayments.

As Allen mentioned, you could possibly switch dividend options to help pay off the loan, then switch back once its paid off.

Most important factor is to make sure the Loan is not enough to cause a future lapse. Get an inforce illustration showing how it looks 40 years from now in its current state. That will show you how vital paying back the loan really is or isnt to the policy.