Loan protection WL vs IUL

[Adam864754]

Can a WL insurance policy lapse due to loan charge’s/interest ? Can a RPU rider prevent lapse due to loan interest charges?
IUL have overload protection rider but what about WL life?
Thanks

 

[scagnt83]

Can a WL insurance policy lapse due to loan charge’s/interest ? Can a RPU rider prevent lapse due to loan interest charges?
IUL have overload protection rider but what about WL life?
Thanks

Yes. A WL can Lapse due to a Loan. Your illustration software will show this scenario if you run it.

RPU has no effect on Loans. RPU or no RPU, too large of a Loan can cause a WL to Lapse.

Penn Mutual WL offers an overloan protection rider on it for free.

 

[Allen Trent]

In addition to the above, RPU is not a rider. It is a legally required non-forfeiture option that all WL must have. It isn't normally the default option as many WL have extended term as the default option.

I believe when many carriers process an RPU request from a client, the loan is maintained & not extinguished as would happen with a 1035 exchange.

 

[DHK]

Can a WL insurance policy lapse due to loan charge’s/interest ? Can a RPU rider prevent lapse due to loan interest charges?
IUL have overload protection rider but what about WL life?
Thanks

RPU isn't a rider. It's a non-forfeiture option that reduces the death benefit and no more premiums are due. Does not affect loans or loan interest.

There are two whole life companies that offer overloan protection rider:
- Penn Mutual
- One America

Now, they use it strategically, not just as a last resort option to prevent a catastrophe (as with IUL in most cases I believe).

They use them to help enhance the amount of cash flow provided against a policy so you can increase that cash flow. It does something to the cash flow loan calculations to have them higher than without the rider.

 

[scagnt83]

Now, they use it strategically, not just as a last resort option to prevent a catastrophe (as with IUL in most cases I believe).

They use them to help enhance the amount of cash flow provided against a policy so you can increase that cash flow. It does something to the cash flow loan calculations to have them higher than without the rider.

I think thats due to the amount of DB protected by the Rider and the way it impacts CVAT calculations.

Imo, not really designed as that but more of a happy accident. It works essentially like the IUL Rider in a catastrophe situation. And according to every Regional Director Ive spoken to at Penn, it was introduced to compete with IULs and take away that competitive advantage they created with overloan riders.


* Interesting side note. Overloan Riders have not been ruled on by the IRS or in Court. So it is completely possible that at some point in the future, all overloan riders are deemed invalid and the IRS treats the policy as a lapsed policy.

This is a bit disconcerting the more Ive thought about this.
If they are so certain of this feature... why not get an IRS Letter of Determination on it? Not like they dont have 20 lawyers on staff. What are they afraid of.... ruining a good marketing tool perhaps?? Something in me thinks the carriers dont have a lot of faith in these riders.

 

[DHK]

Imo, not really designed as that but more of a happy accident.

Not according to the wholesalers at OneAmerica. They designed it specifically to enhance cash flow from the policy.

And from what I've seen and heard for Penn's cash flow projections, it was no accident.

 

[DHK]

* Interesting side note. Overloan Riders have not been ruled on by the IRS or in Court. So it is completely possible that at some point in the future, all overloan riders are deemed invalid and the IRS treats the policy as a lapsed policy.

Immaterial.

All the insurance company has to do is keep the policy in-force. If the policy stays in-force, there's no triggering phantom income tax.

The control is in the hands of the insurance company. They include the rider so there's some kind of pricing and/or control mechanism in place.

 

[scagnt83]

Not according to the wholesalers at OneAmerica. They designed it specifically to enhance cash flow from the policy.

And from what I've seen and heard for Penn's cash flow projections, it was no accident.

I was speaking about Penn. I dont do business with OneAmerica.

And when I had dinner with a group of regional directors at Penn years back, they all agreed it was implemented as a competitive advantage over other WL policies. Since then, they have promoted the fact that it does give a higher income stream when used. Perhaps they have tweaked it since its inception to enhance that aspect. But initially the primary goal was a competitive advantage.

 

[scagnt83]

Immaterial.

All the insurance company has to do is keep the policy in-force. If the policy stays in-force, there's no triggering phantom income tax.

The control is in the hands of the insurance company. They include the rider so there's some kind of pricing and/or control mechanism in place.

BS. Its important enough that they state it in both the illustration and the contract.

If the IRS has not ruled on it... its a grey area that certainly has the potential to change based on an IRS or Court ruling. They would not say that in the contract if it wasnt.

In THEORY it should abide by IRS regulations. But the IRS has shot down a ton of THEORIES in court over the years.

And if it was such a sure thing, why would a multi-billion dollar insurer not spend a few thousand to get an IRS LoD on the subject?? The answer is obvious... they dont want to risk a denial.

And the control is not in the hands of the insurance carrier. They do not determine tax law or how new features are considered by the IRS. Only the IRS and the Courts are in control of that.

This is a product feature that has only existed for maybe 20 years max, until it has an IRS LoD, or a Court Ruling; there is no guarantee it will be considered compliant in the future. And insurers get IRS LoDs all the time for new product features that are tax related.... so it begs the question why none have so far for this one particular product feature....

 

[DHK]

I was speaking about Penn. I dont do business with OneAmerica.

And when I had dinner with a group of regional directors at Penn years back, they all agreed it was implemented as a competitive advantage over other WL policies. Since then, they have promoted the fact that it does give a higher income stream when used. Perhaps they have tweaked it since its inception to enhance that aspect. But initially the primary goal was a competitive advantage.

Agreed that it was a measure to keep up to competition. For a long time, I thought they were the only WL carrier with the OPR.

I'm certain that there's an "official company line" about it, but I believe behind closed doors, they pull the right levers in the contract to create an additional competitive advantage that happens to work within the policy's mechanics.

I'm not knocking them on it. I just wish more companies would be more open about their intentions and just 'own' it, be proud of it, and promote it. But I'm sure there's some reason they can't or don't. Fine by me.