Loan vs Surrender in Whole life

Jun 10, 2019

  1. ls015
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    ls015 Expert

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    If someone is borrowing 40k per year in retirement from their million dollar cash value policy, isn't it better to pay one time tax of 10% than 5% interest which will compound against you and deplete all your death benefit? It won't even be 10% tax after you take standard deductions.
     
    ls015, Jun 10, 2019
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  2. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    If you're talking about $1 million in cash values and you're needing $40k (4%) against it, I'd take the loan. Why? Because the original balance ($1 mil) will continue to grow to offset the loan interest costs. Project that out over 20+ years and see how that works using current rates.
     
    DHK, Jun 10, 2019
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  3. ls015
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    ls015 Expert

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    Sorry, should have said partial surrender of 40k every year.
     
    ls015, Jun 10, 2019
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  4. Allen Trent
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    Allen Trent Guru

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    I believe You are misunderstanding a great deal of the tax code. I believe you are mentioning the 10% amount because that is a penalty by the IRS for distributions before she 59 1/2. That doesn't apply to non-MEC life insurance distributions.

    If you are thinking a 10% income tax rate, that is likely a much lower marginal rate than a person who could afford to accumulate 1M in a life policy would be in. Much more likely this type of client would be in the 25%,30% or 35% marginal tax rate in addition to owing additional State income taxes, taxes on Social Security, additional Medicare Premium surcharges for higher incomes. Lastly, the standard deduction of 25k per couple will apply regardless, so a high income earner would likely have already used that up. The standard deduction wiping away income really only applies to relatively low income earners that live only on Soc Sec and another 15-20k per year from income or IRA or pension income
     
  5. Allen Trent
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    Allen Trent Guru

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    Partial surrender on a non MEC would be tax free recovery of the adjusted cost basis into the policy 1st before owing anything on the gains. LIFO(last in first out)
     
  6. ls015
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    ls015 Expert

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    Time helps a person accumulate million dollars in a policy if he started early and stuck to it.
    After retiring, why would he be in 35% tax bracket? If he just wants to withdraw 40k per year from his policy and not touch any other investments like 401k, he will be in 10% tax bracket.
    My question is, assuming the above, is it better to take the 40k as loan or as partial surrender. Is it better to pay one time 10% income tax or 6% interest which compounds against you every year.

    I think agents were taught by life insurance companies to promote loans as it is an income for them.

    Another thing, about the critical illness rider. If a person has a terminal illness and is expected not to live more than 12 months, then about 500k can be advanced. It is projected as a good heart on the part of the insurance company. In reality, an opportunity to cut their liability in half (if its a million dollar policy) in less than 12 months:) If they really have good hearts, then they should also pay the remaining as DB.
     
    ls015, Jun 10, 2019
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  7. Tahoe Ray
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    Tahoe Ray Guru

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    Allen is saying that if you have the resources to accumulate 1m in cash in a policy, you likely aren't living on 40k/yr unless you move to Thailand.

    There would be no tax taking w/ds (to basis) or loans so I'm not sure what you mean about the 10% vs 6%.

    If you're taking loans, you're still getting dividends or interest credits (depending on the product) so the goal is to wash the loan interest.

    I also don't understand the "good heart" comments. This is business and we're talking about contracts. The devil is in the details and are normally spelled out specifically (or vaguely, if we're talking about "free" benefits).
     
  8. Allen Trent
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    in your example, he must be under age 70 1/2 to not have to take IRA or 401k distributions or has no money in such plans. the client may also be, in your example, not collecting any Social Security checks. So, we now have a person likely between 50 & 65 who built $1M in a life policy, but can live on $40k per year. If that is true and there are some of those type of people out there for sure, the client would actually be in the 0% tax bracket because none of the life insurance distributions would be reported as taxable income until they 1st recover all their adjusted cost basis (premiums to base policy). this type of client would likely be better off to take the $40k out each year from qualified plans to wash the tax rate at a much lower rate than may happen when they are 70 1/2 or when they pass away. People in low tax rates are likely best served getting taxable money from qualified plans, IRAs & NQ Annuities. High income people tend to be more likely to need to get annual income needs on a tax favored basis from Life insurance, Roth, capital gains, tax free bonds.
     
  9. Lloyds of Lubbock
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    Lloyds of Lubbock Super Genius

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    Agents are not taught to promote loans to enrich the company.
    Loans are used after basis is used up to avoid taxable income.
    If you are young enough to have time working on your side and you are fortunate enough to accumulate a million dollars in your whole life policy:
    Figuring out what is best today may not be what is best in the future.
    Trying to answer this question without seeing your policy design will also be difficult.
    Knowing your life insurance needs 20-30 years down the road is guess but if the db still plays an important role: a loan lowers your db dollar per dollar.
    A surrender lowers your db more than each dollar surrendered.
    If you are taking 40k in income, plus you will be getting SS, you are not in a 10% tax bracket.
    As someone in retirement I can tell you non taxable money spends better than taxable money.
    By delaying your 401k or other qualified assets aren't you creating a bigger tax liability in the future? Not to mention passing o qualified money at death
    Regardless of what you think the best answer is today, you are creating options for yourself in the future.
    Not a bad position to be in
     
  10. ls015
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    ls015 Expert

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    Thanks for your posts. My question is purely from a mathematical perspective. I will ask for illustrations. Same exact cash value at age, say, 65 and loan vs surrender. After 20 years, which will have better CV and DB left in it. If you have to take a guess, what would be your guess?
     
    ls015, Jun 11, 2019
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