Universal life insurance. Loan VS. withdrawal

[Tim Lumbao]

Still, why did he buy the policy in the first place?

If it was for tax advantaged growth, why would he want to surrender the whole thing?

Someone sold it to him a long time ago. He even forgot that he have it for 30 years.

 

[Allen Trent]

Now that I did some numbers he is going to get taxed for 15k of his cash value. Around 10% federal bases on what the carrier told us, but do we get state tax too? The carrier did not tell us. We live in VA.

carrier cant tell you how much he will owe in taxes as that will depend on his overall tax rate. He will owe both Federal & state taxes.

If I was him, I wouldnt surrender the entire thing if he truly will owe taxes on $15k of gains (he will owe both federal & state taxes, so depending on his tax bracket, he could owe at tax filing time anywhere from say $2,200 to potentially $7,000 or more depending on his income & which state he lives in)

So, if he has $53k of total cash value & the carrier says $15k is taxable gain, this means his cost basis is $38k. If true, he could take $38k withdrawal of his cost basis tax free & leave the $15k taxable gain in the policy & avoid owing any tax at all. Again, verify the policy is not a modified endowment contract, because if it is a MEC, he wont be able to pull the $38,000 withdrawal as a tax free as he will have to pull out the taxable gain 1st from a MEC

He could then buy either a Single Premium Life policy or a Non Qualified Annuity & 1035 exchange the $15k cash value over to that new policy & leave it there for his future, thus continuing to defer the taxable gain from being reported to the IRS until he receives a future distribution if he ever takes money out. if he never takes the money out, it would be tax free to his beneficiaries if he buys a Single Premium Life policy or if he buys a Non-Qualified Annuity, it will be taxable to his beneficiaries

 

[scagnt83]

Ditto to the NQ annuity. If he does not need or want the life DB, then 1035 the gains to an annuity. No worries in the future about the policy crashing and him losing the funds.

Taking out most of the funds will put the policy in a position to possibly lapse in the near future. Instead of paying taxes on the $15k, he will just lose it to the insurer.

Right now that CV is helping to sustain the policy with the interest it generates. Especially if he is no longer paying premiums into the policy.

 

[Tim Lumbao]

carrier cant tell you how much he will owe in taxes as that will depend on his overall tax rate. He will owe both Federal & state taxes.

If I was him, I wouldnt surrender the entire thing if he truly will owe taxes on $15k of gains (he will owe both federal & state taxes, so depending on his tax bracket, he could owe at tax filing time anywhere from say $2,200 to potentially $7,000 or more depending on his income & which state he lives in)

So, if he has $53k of total cash value & the carrier says $15k is taxable gain, this means his cost basis is $38k. If true, he could take $38k withdrawal of his cost basis tax free & leave the $15k taxable gain in the policy & avoid owing any tax at all. Again, verify the policy is not a modified endowment contract, because if it is a MEC, he wont be able to pull the $38,000 withdrawal as a tax free as he will have to pull out the taxable gain 1st from a MEC

He could then buy either a Single Premium Life policy or a Non Qualified Annuity & 1035 exchange the $15k cash value over to that new policy & leave it there for his future, thus continuing to defer the taxable gain from being reported to the IRS until he receives a future distribution if he ever takes money out. if he never takes the money out, it would be tax free to his beneficiaries if he buys a Single Premium Life policy or if he buys a Non-Qualified Annuity, it will be taxable to his beneficiaries

Awesome. This is something cool that I didn’t think about. How can we find out about all the numbers that we need? The carrier which is State Farm is giving us a hard time to get the information. They have a limited information online and They send us to the local agent to get the numbers.

 

[Tim Lumbao]

Ditto to the NQ annuity. If he does not need or want the life DB, then 1035 the gains to an annuity. No worries in the future about the policy crashing and him losing the funds.

Taking out most of the funds will put the policy in a position to possibly lapse in the near future. Instead of paying taxes on the $15k, he will just lose it to the insurer.

Right now that CV is helping to sustain the policy with the interest it generates. Especially if he is no longer paying premiums into the policy.

Good plan. So we can call the Carrier and withdraw the cost basis so we don’t get tax? then 1035 exchange the cash value to annuity?

 

[Allen Trent]

Awesome. This is something cool that I didn’t think about. How can we find out about all the numbers that we need? The carrier which is State Farm is giving us a hard time to get the information. They have a limited information online and They send us to the local agent to get the numbers.

Carrier is the only place to get the cost basis & taxable gain amounts & whether it is a MEC or not.

 

[Allen Trent]

Good plan. So we can call the Carrier and withdraw the cost basis so we don’t get tax? then 1035 exchange the cash value to annuity?

Correct-- but make sure the cost basis is withdrawn before you ever do the new NQ annuity. Otherwise, if you set up the new NQ annuity & send 1035 exchange the life to the NQ annuity, it would move all $53k of cash value over. then, it would be too late to get the cost basis out tax free as NQ annuity make you take the gains out before you can get the tax fre cost basis.

 

[Tim Lumbao]

Carrier is the only place to get the cost basis & taxable gain amounts & whether it is a MEC or not.

He put in the minimum payment for a UL policy. I’m pretty sure he did not met the MEC standards

 

[Allen Trent]

Awesome. This is something cool that I didn’t think about. How can we find out about all the numbers that we need? The carrier which is State Farm is giving us a hard time to get the information. They have a limited information online and They send us to the local agent to get the numbers.

have client call State Farm & tell them he needs 3 items in writing:

1. Cost basis
2. Taxable gain
3. if policy is a MEC or not

form to take a withdrawal (If this isnt a UL like you said & is instead a Whole Life policy, it wont work like we have been telling you as Whole Life has totally different moving parts & no way to take a withdrawal of the base cash value, you can only withdrawal Whole Life paid up additions values (if any)

 

[Tim Lumbao]

Correct-- but make sure the cost basis is withdrawn before you ever do the new NQ annuity. Otherwise, if you set up the new NQ annuity & send 1035 exchange the life to the NQ annuity, it would move all $53k of cash value over. then, it would be too late to get the cost basis out tax free as NQ annuity make you take the gains out before you can get the tax fre cost basis.

NQ annuity make you take the gains out before you can get the tax fre cost basis.[/QUOTE] dumb this down for me please.