Loan vs Surrender in Whole life

[Allen Trent]

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?

that math problem cant be solved without knowing how much in total can be surrendered. base policy cash values cannot be partially surrendered, they must either be borrowed or the policy fully surrendered. Only PUAR values bought with PUAR premium or PUAR values bought by dividends can be partially surrendered. so, you would need to know how much of the $1M cash value is base cash value & how much in PUAR values.

I have always been a fan of partial surrenders if the person has no intention to repay & the larger death benefit reduction is not of great concern. Basically, surrenders/withdrawals to basis until basis fully recovered, then loans.

 

[Lloyds of Lubbock]

A face amount reduction will also release money that can be withdrawn.
As far as your example.
Withdrawals after basis will be taxed, you can do a double surrender to withdraw for income and to pay the tax.

 

[Lloyds of Lubbock]

to basis and borrow

 

[Allen Trent]

A face amount reduction will also release money that can be withdrawn

do most of the carriers you write WL with offer partial face reductions? just curious how common that is. I have not seen it executed very much on policies clients could no longer fully fund & instead of an agent helping someone do a face reduction, I see policies getting destroyed with Automatic Premium Loan borrowing from itself to pay the premium. great feature if it is allowed like you mention. Good to know. Thanks

 

[Lloyds of Lubbock]

We never have a problem with a face amount reduction.
Many time smeone comes to us with a loan we are able to payback with a face reduction.
Where it can be problematic is when the face reduction would change the underwriting class.

 

[SParker]

Only PUAR values bought with PUAR premium or PUAR values bought by dividends can be partially surrendered. so, you would need to know how much of the $1M cash value is base cash value & how much in PUAR values.

Does the policy's annual statement show the breakdown between base values vs PUAR values?

 

[Allen Trent]

Does the policy's annual statement show the breakdown between base values vs PUAR values?

most carriers do, but not all. their carrier computer systems show all of it and many show on the mailed anniversary statement to the client in 2 columns (cash value & death benefit), those columns would then show 4 rows for each of the 2 columns, such as: base policy, PUAR from PUAR rider, PUAR from Dividends & finally, a row with the total of each of these 3 amounts. It may also then show the loan amount & the current year dividend & what that dividend was used for

 

[scagnt83]

do most of the carriers you write WL with offer partial face reductions? just curious how common that is. I have not seen it executed very much on policies clients could no longer fully fund & instead of an agent helping someone do a face reduction, I see policies getting destroyed with Automatic Premium Loan borrowing from itself to pay the premium. great feature if it is allowed like you mention. Good to know. Thanks

I have done this on a few WLs and plenty of old ULs. The carrier usually does not mention it in any correspondence. But if you call and request it, Ive never had an issue with it. One of those things it takes an agents knowledge to fix.

 

[scagnt83]

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

As someone who was trained directly by one of the major mutual insurers, I can assure you, this is not what agents are taught by the insurance companies.

We were always taught to Withdraw to Basis and only after that take Loans.

Now when it comes to IUL, often all Loans are the way to go. But most WL carriers Ive worked with push withdraw to basis method.

 

[Lloyds of Lubbock]

You should run yourself some illustrations so you can see the impact.
Dont forget if your dividends go over basis, they are taxed.
Any distributions from the policy will be loans as you have no adds by taking your dividends.
Your dividends will also look different as they are just a base dividend and you will not be getting dividends on your adds.
I have found company software is very good at showing how a policy works.....not how it will perform.
Run some stuff on yourself with different options, blend with term, max pua, divs to cash, divs to reduce premium , maybe pua till a certain age then rpu and divs in cash, etc
Good luck!