Met life LIFE 98

[Allen Trent]

Other than RPU, that is exactly what will happen.

RPU keeps the policy "intact" and avoids any taxation issues on the Loans. It is what overloan protection riders do, it RPUs the policy.

But I doubt they are able to RPU a policy with such a tiny CV. You need equity in the policy to RPU outside of an Overloan Rider.

Agree, but this must have a positive CV of a small amount. RPU can be an absolute tiny amount. Have seen policies in first few years even go RPU for a $1,000 face amount. However, I am not so sure going RPU carries the loan forward with some carriers. It should, but I would want that confirmed by the carrier to make sure they are not going to treat it like a 1035 exchange. I know that most carriers use both the base CV & the PUAR to purchase the RPU, thus losing the more liquid RPU. But need to make sure they dont also fully extinguish the loan with PUAR & base cash value.

 

[scagnt83]

They wont take the CV. The Loan balance is already accounted for in the CV. The CV is what is available to the policy owner. You can see it very clearly if you run Loans on an IUL and look at the expense report.

But even by definition:
"Surrender Value"... the legal definition is the value you get if you Surrender the policy.

Policy Value or Surrender Value has already been reduced by the Loan and Interest.

However, for RPU, they could take the CV because its being used to "pay up" the policy for life. Its not being surrendered.

I have seen some IUL/UL carriers leave the CV whole, and reduce SV when a participating loan is taken. That is the perfect example of how the policy accounts for it.

CV is still there, but SV is lowered because of the Loan.

Ive always seen WLs just reduce the Policy Value regardless of the type of Loan. But that could possibly vary from carrier to carrier. So I could be wrong about them not taking the CV. However, based on the numbers given, I dont think I am. $150k loan with a $20k CV while no premiums are being paid, sounds about right to me.

 

[scagnt83]

Agree, but this must have a positive CV of a small amount. RPU can be an absolute tiny amount. Have seen policies in first few years even go RPU for a $1,000 face amount. However, I am not so sure going RPU carries the loan forward with some carriers. It should, but I would want that confirmed by the carrier to make sure they are not going to treat it like a 1035 exchange. I know that most carriers use both the base CV & the PUAR to purchase the RPU, thus losing the more liquid RPU. But need to make sure they dont also fully extinguish the loan with PUAR & base cash value.

They settle the Loan, it does not carry forward. But the policy is still active. So settling the Loan is not a taxable event.. from what I have always seen.

Now Im curious, so I will run an illustration later today to make sure it works out that way.

I know for a fact that the Overloan Protection RPU event settles the Loan for no taxable event. (admittedly a bit of a grey area in tax law though)

I dont see how they could legally treat it as a 1035 unless they issued a completely new contract with a new policy number. RPU is the same contract, same policy number, just an addendum added to the contract.

And RPU can be a tiny amount, but will all carriers issue a tiny amount? idk

 

[Allen Trent]

I have seen some IUL/UL carriers leave the CV whole, and reduce SV when a participating loan is taken. That is the perfect example of how the policy accounts for it.

CV is still there, but SV is lowered because of the Loan.

Ive always seen WLs just reduce the Policy Value regardless of the type of Loan. But that could possibly vary from carrier to carrier. So I could be wrong about them not taking the CV. However, based on the numbers given, I dont think I am. $150k loan with a $20k CV while no premiums are being paid, sounds about right to me.

Many carriers systems would show this as $170k cash value, $150k Loan, $20k Loan available & $20k Surrender value. The reason is the interest/dividend being credited each year is based on the $170k cash value (especially in non direct recognition), but surrender value would be $20k because of loan balance & face amount also reduced by the $150k loan

 

[scagnt83]

Many carriers systems would show this as $170k cash value, $150k Loan, $20k Loan available & $20k Surrender value. The reason is the interest/dividend being credited each year is based on the $170k cash value (especially in non direct recognition), but surrender value would be $20k because of loan balance & face amount also reduced by the $150k loan

So you feel its a possibility for the OP because its WL and does not separate the CV/SV on paper for the client?

 

[Allen Trent]

They settle the Loan, it does not carry forward. But the policy is still active. So settling the Loan is not a taxable event.. from what I have always seen.

Now Im curious, so I will run an illustration later today to make sure it works out that way.

I know for a fact that the Overloan Protection RPU event settles the Loan for no taxable event. (admittedly a bit of a grey area in tax law though)

if they dont carry the loan forward & are settling the loan, going RPU would be a taxable event when there is a gain, etc.

This is why I suggested he ask about all 3 scenarios & how each would report on a 1099 as even carriers handle each of these differently either out of ignorance or creativity, etc. TH biggest issue I hear about Met Life is that they really dont have employees servicing these & have some small 3rd party vendor servicing (not sure this is true or just rumor), but I can imagine how bad info could be shared by poorly experienced CS rep...........................if we are having trouble ourselves figuring out how to help someone out of this horrible predicament

 

[Allen Trent]

So you feel its a possibility for the OP because its WL and does not separate the CV/SV on paper for the client?

yes I do. I think you are thinking more about an illustration rather than the true accounting in a carrier system. If non direct recognition policies, I think the carrier system & their accounting is going to show 2 identical policies (1 with no loan & 1 with large loan) having the exact same cash values, but entirely different surrender values. The loan balance is going to be on the carrier balance sheet as an asset. The loan balance is going to be a client liability attached to the policy that reduces the death benefit & the surrender value by the outstanding loan amount

 

[scagnt83]

if they dont carry the loan forward & are settling the loan, going RPU would be a taxable event when there is a gain, etc.

A settled loan is only a taxable event on a lapsed policy.

No different than the Loan being paid back.

Maybe Im wrong. But how are the Overloan Protection Riders doing it? They RPU the policy and wash out the Loan to avoid a taxable event for the client.

 

[scagnt83]

yes I do. I think you are thinking more about an illustration rather than the true accounting in a carrier system. If non direct recognition policies, I think the carrier system & their accounting is going to show 2 identical policies (1 with no loan & 1 with large loan) having the exact same cash values, but entirely different surrender values. The loan balance is going to be on the carrier balance sheet as an asset. The loan balance is going to be a client liability attached to the policy that reduces the death benefit & the surrender value by the outstanding loan amount

I guess we need to know the exact terminology being used for the OPs CV. lol

I assumed it was just the Cash Surrender Value of the policy.

I think most modern WL policy statements show Surrender Value as the "Policy Value" on the statement. But the older policies very well could break it out differently on the clients end. You certainly have more experience with policies from the 90s than I do.

 

[Allen Trent]

A settled loan is only a taxable event on a lapsed policy.

No different than the Loan being paid back.

Maybe Im wrong. But how are the Overloan Protection Riders doing it? They RPU the policy and wash out the Loan to avoid a taxable event for the client.

RPU is a non-forfeiture option

Non-forfeiture options are provisions for lapsed policies

I would hope a carrier would allow RPU to keep policy active & not report the loan as a taxable event, I am just not 100% certain the carrier can or will or how they have to account for basis/gain in a policy with a large extinguished loan that is greater than basis.

PS-- another 4 option to look into is to see if changing ownership of policy to a charity could at all be an option. I know that ownership changes on a MEC is a taxable event to the releasing owner, but I am not sure if a ownership change on a non-MEC is a taxable event to the releasing owner