Met life LIFE 98

[Deepsea]

I have two life 98 policy’s on my life purchased when my son was born in 1993.
Policies were 2, each for $500,000. Premium is close to $4000 a year for each one. I haven’t paid premiums for about 7 years, and I’ve borrowed against the policy’s and taken dividends so each policy has a death benefit of about $340,000 each.
One policy has a cash value of $22,000 and my other policy has a cash value of about $27,000.

I think I might have to add money to each policy in possibly 5-10 years (start paying premiums again).
Current loan on each policy is around $170,000.

When I bought the policies as part of the contract there were set tables based on my age and payable per thousand of value if I wanted to convert to an annuity.

Problem is I have a gain on each policy of about $125,000. If I wanted to convert to an annuity, could I convert just the current cash value or would I have to pay back the outstanding loans to do that ?

And as a non forfeiture option could I convert the cash in the policies with Met life to a very reduced paid up policy ?

(thanks for any insight. I was an agent from 2013-2016)…..but I have no idea about my options.
Also how old do I have to be to sell my policies ? I’m 58 years old now.)

 

[Deepsea]

Thinking about it I see no way to erase the gain. Hopefully someone might have an idea.
I have other assets for my son to inherit if I die, a warehouse and my house, etc.

I’m thinking it may be best to surrender one policy in 2023, and one policy in 2024. That way I’ll only have a 125k gain in each year rather than a 250k gain in one year.

So after my real estate income is reduced to 54k after deductions and depreciation and the other 16k in income had/ have for 2023 a 125k gain added to 70k is 195k and the tax owed on 195k adjusted gross income after individual tax exemption is taken into account is $34,647 +8,000 = 42,647 and cash value of approx $28,000 on one policy would reduce to about 15,000 owed for taxes. Which seems acceptable.

Does this seem like a reasonable plan ?

 

[DHK]

Ask Met Life what the estimated phantom income tax implications can be if you surrender your policies with a gain and a loan outstanding.

[EXTERNAL LINK] - Hefty tax bills could lurk in failed life insurance policies - InvestmentNews

In the event of a surrender, phantom income is the gross distribution the insurer pays to the client at surrender minus the amount the client invested into the contract. The difference left over is considered taxable income. This amount is also called “phantom income” because if the client has outstanding loans (and interest) against the cash value, the gross distribution will go toward repayment of that loan. As such, a client who has large loans against a policy could receive a very small check from the insurer at surrender — but still face a very large income tax bill.

 

[scagnt83]

I have two life 98 policy’s on my life purchased when my son was born in 1993.
Policies were 2, each for $500,000. Premium is close to $4000 a year for each one. I haven’t paid premiums for about 7 years, and I’ve borrowed against the policy’s and taken dividends so each policy has a death benefit of about $340,000 each.
One policy has a cash value of $22,000 and my other policy has a cash value of about $27,000.

I think I might have to add money to each policy in possibly 5-10 years (start paying premiums again).
Current loan on each policy is around $170,000.

When I bought the policies as part of the contract there were set tables based on my age and payable per thousand of value if I wanted to convert to an annuity.

Problem is I have a gain on each policy of about $125,000. If I wanted to convert to an annuity, could I convert just the current cash value or would I have to pay back the outstanding loans to do that ?

And as a non forfeiture option could I convert the cash in the policies with Met life to a very reduced paid up policy ?

(thanks for any insight. I was an agent from 2013-2016)…..but I have no idea about my options.
Also how old do I have to be to sell my policies ? I’m 58 years old now.)

Thinking about it I see no way to erase the gain. Hopefully someone might have an idea.
I have other assets for my son to inherit if I die, a warehouse and my house, etc.

I’m thinking it may be best to surrender one policy in 2023, and one policy in 2024. That way I’ll only have a 125k gain in each year rather than a 250k gain in one year.

So after my real estate income is reduced to 54k after deductions and depreciation and the other 16k in income had/ have for 2023 a 125k gain added to 70k is 195k and the tax owed on 195k adjusted gross income after individual tax exemption is taken into account is $34,647 +8,000 = 42,647 and cash value of approx $28,000 on one policy would reduce to about 15,000 owed for taxes. Which seems acceptable.

Does this seem like a reasonable plan ?

Maybe, maybe not.

You could 1035 the CV to annuities. But that does nothing for your tax situation.

RPU would be your best bet, but Im not sure they will do RPU with that large of a Loan/CV ratio. But you certainly should ask. Even if its $500 , it will let you avoid $35k in taxes.

But you also lose your current CV of $49k with a RPU option. So hopefully the DB will be $100k or more with that... but with those large Loans its hard to say what they will calculate.

Your taxes are less than the current CV. Just surrender the policy, take the CV and pay the taxes with it. The 2 year idea is a good idea. One now, the other Jan 2nd.


Or, maybe look for a true single premium WL or IUL that will accept Loans on a 1035.
Instead of paying $35k or $40k in taxes, pay that in a single premium payment for a paid up policy. Then have the annual gains directed towards paying off the loan. You would have to illustrate it to know if it will work out, but its a possible option.

 

[scagnt83]

Ask Met Life what the estimated phantom income tax implications can be if you surrender your policies with a gain and a loan outstanding.

[EXTERNAL LINK] - Hefty tax bills could lurk in failed life insurance policies - InvestmentNews

He seems to be aware of it, since he is assuming the Loan - Basis will be taxable as income. Which is correct. (lesser of Loan or Gain in policy)

 

[Deepsea]

The Cash value on each policy is not enough do pay the respective tax liability.

What’s also odd is that the policy I bought in May of 1993 has a higher interest rate on loans than the same policy bought 3 months earlier. I am definitely getting rid of the higher loan interest policy right away.

And most likely surrendering the other one in the beginning of next year.

 

[scagnt83]

The Cash value on each policy is not enough do pay the respective tax liability.

How so? With a $195k income your effective tax rate is 19%.

That is $47k in taxes owed on the 2 policies. (19% x $125kgain)

Its not enough to pay all of your taxes each year. But it covers the portion attributed to your policy gains.

Now I left state taxes out, so maybe that pushes you over by a small amount. But it seems to be just enough.

 

[scagnt83]

What’s also odd is that the policy I bought in May of 1993 has a higher interest rate on loans than the same policy bought 3 months earlier. I am definitely getting rid of the higher loan interest policy right away.

Likely a different policy line. Or a different type of Loan. It is odd though.

What dividend rate is it currently receiving? What is the Loan rate?

 

[Deepsea]

Loan rate on the policy I just surrendered had just moved up to 5%.
The one purchased three months earlier in 1993, still has a 4.25 interest rate.
Same EXACT policy description. Same policies, just bought 3 months apart in 1993.
Why do they do that ?
Because they can
Because they don’t care
Because they don’t know.

 

[Deepsea]

Also it look like after surrendering the policy today that for my 2023 income tax…….after I apply my cash value to the taxes owed do to the gain, I’ll owe an additional 7k-8k in income tax.
Keeping the other policy until the renewal in Feb of 2024.
May surrender or pay the premium, probably surrender that also.