Tax implications of 1035 with loan

Jan 7, 2008

  1. loginname
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    loginname Expert

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    I don't know if this situation has been discussed much on the board. Please tell me if my understanding of the tax law is correct. My is 56 years old. He is in great health. He has a whole life policy with a $115,000 death benefit, $50,000 cash value, $30,000 loan, and $29,000 basis.
    We are considering a 1035 to UL or VUL because the current policy is going to implode (we've run the inforce).
    What will be the tax consequence if he just transfers the NET cash value? As I understand it, the "boot" received by the loan being eliminated is taxable up to the amount of gain in the policy. In this case, he would owe income tax on $21,000. Am I correct in this assumption? If we go with a VUL, we may just transfer the loan with the 1035 and not have this tax problem. The VUL runs fine with the loan and an assumed return of 6.5%. Your thoughts?
     
  2. Mr. Bill
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    Mr. Bill Guru

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    Ah, another f-p.com user!
     
  3. policy doctor
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    policy doctor Guru

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    LOL....right. And how does a whole life implode?
     
  4. loginname
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    So I can't post a thread on financial-planning.com and this one at the same time? Sorry, I didn't see that in the fine print.

    The client will be getting a higher death benefit with less premiums by executing the 1035. It is in the best interest of the client if he can qualify for Preferred or Standard. Implode was too strong of a word. The policy will require ongoing premiums for life with a reduction in death benefit according to the inforce illustration.

    Does anyone want to answer the question? I believe I am correct in my assumptions, but one of my collegues said there would be no tax implications. I don't trust her answer though. Thanks in advance for thoughtful replies.
     
    Last edited: Jan 7, 2008
  5. James
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    Yea, I was wondering that also? Oh, yea they want to transfer it to a VUL or UL, of course they never implode!

    I'm no tax expert but, I think your tax considerations is just a little off, on the high side. Now is the WL policy a Par WL? Or, what is the issueing company of this WL Policy. I can not imagine if this WL is half way decent how you can beat it now with CV nearing half of the DB? I'm assuming a 3% guarantee rate and the Dividends (if it is a Par WL with PUA), it should be performing around 6.5% at a lower cost then a VUL. Maybe there is a good reason, if the CV is no longer needed or desired (yet since there is already a loan in place I would have to guestion that) and a greater DB is the only need, maybe but, I would be careful before ending a WL Policy.
     
    James, Jan 7, 2008
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  6. James
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    The most I see in tax implications is base on $1,000. $29,000 cost basis with a loan of $30,000. I wouldn't transfer the loan if you was to roll over the policy meaning the difference of $1,000 tax liability, that I see. Once again I am not a tax expert. If you rolled over the loan if possible, I don't see why there would be any tax involved?
     
    James, Jan 7, 2008
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  7. loginname
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    Comparing 2 options: 1. Keep the current policy 2. 1035 to secondary guarantee UL or VUL run 6.5%

    The client is able to get a higher death benefit (he likes that idea because this is his only permanent coverage) and stopping premium payments after 10 years (instead of paying premiums for life on the whole life). I have explained the possibility of needing additional premiums if the VUL subaccounts do not perform. He is comfortable with this risk.

    I am putting the client in a better position regarding death benefit and premium payments. I just want to make sure of tax implications.
     
  8. loginname
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    Issuing company is NY Life
     
  9. djs
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    djs Super Moderator Moderator

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    I'm not a tax expert, but I would research withdrawing the basis, paying the loan. There might be an easier way to do it, but in general, that would leave you a $1000 loan value to worry about.

    I'd love to better understand why people think whole-life policies don't implode, especially if they are increasing value policies, with a few 'missed-payments'.

    Dan
     
    djs, Jan 7, 2008
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  10. James
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    Well, I don't know what kind of contract doesn't implode or cancelled if you stop paying??? Yet, with $30,000 in CV, one would have to miss a lot of payments for it to be cancelled not implode. I think in common terminology when people talk about UL imploding it doesn't mean that payments were missed.

    Most agents have no idea how WL works or for that matter how UL's work, here is a good site to actually see how WL works.

    The Visible Policy: Participating Whole Life Insurance Explained It is even a NYL Policy.
     
    James, Jan 9, 2008
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