Universal life insurance. Loan VS. withdrawal

[Allen Trent]

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

dont assume that. While it is likely true, policy changes or previous withdrawals can have impacts to a policy that can retroactively make it a MEC. Very unlikely, but assuming it & not knowing for sure can totally change how it is impacted tax wise.

 

[Allen Trent]

NQ annuity make you take the gains out before you can get the tax fre cost basis.

dumb this down for me please.[/QUOTE]

non MEC life insurance is FIFO( First in First out)--- means you can take money out of life insurance by getting access to your Premiums cost basis before having to take any of the gains-interest out. If I put $38k in in premiums & it grew to $53k, and I want to take out $10k or use as collateral, I wont get taxed as I am accessing my 1st in money of basis-premiums

MEC Life & NQ annuity are LIFO ( Last in First Out). You have to take out your taxable gains-interest before you can ever touch your cost basis-premiums tax free. I put $38k in & it builds to $53k. If I want to take $10k out, it will be all taxable because I have $15k of gains-interest built up

 

[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Correct-- but make sure the cost basis is withdrawn before you ever do the new NQ annuity.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.

So if you move all the 53k in NQ annuity you lose all the cost basis/ or all the money that you put in that you already paid tax for? And the whole 53k on the new annuity will be taxable? Doesn’t make sense to me

 

[Tim Lumbao]

dumb this down for me please.

non MEC life insurance is FIFO( First in First out)--- means you can take money out of life insurance by getting access to your Premiums cost basis before having to take any of the gains-interest out. If I put $38k in in premiums & it grew to $53k, and I want to take out $10k or use as collateral, I wont get taxed as I am accessing my 1st in money of basis-premiums

MEC Life & NQ annuity are LIFO ( Last in First Out). You have to take out your taxable gains-interest before you can ever touch your cost basis-premiums tax free. I put $38k in & it builds to $53k. If I want to take $10k out, it will be all taxable because I have $15k of gains-interest built up[/QUOTE]
Dude. Didn’t even know about this thanks

 

[Allen Trent]

non MEC life insurance is FIFO( First in First out)--- means you can take money out of life insurance by getting access to your Premiums cost basis before having to take any of the gains-interest out. If I put $38k in in premiums & it grew to $53k, and I want to take out $10k or use as collateral, I wont get taxed as I am accessing my 1st in money of basis-premiums

MEC Life & NQ annuity are LIFO ( Last in First Out). You have to take out your taxable gains-interest before you can ever touch your cost basis-premiums tax free. I put $38k in & it builds to $53k. If I want to take $10k out, it will be all taxable because I have $15k of gains-interest built up

Dude. Didn’t even know about this thanks[/QUOTE]

Most agents in industry dont either & still sell a lot without knowing how to properly design policies or advise on how to utilize policies already in force.

This is why @scagnt83 was saying what he was about learning more about products before selling/servicing, etc

 

[PrivClientSG]

I got a client who have 53k cash value and 220kdeathbenefit on his UL insurance. He is single and doesn’t have a family except a brother who is single too. Base on his finances he doesn’t need a life insurance for 220k, but he wants to pay his debt around 30k. He wants to use his cash value to do it. What are the pros, coms and tax consequences for withdrawing or loaning?. Can we loan it, then let it lapse by itself so we don’t have to pay taxes? What’s the best move? Thanks

The intention of letting the policy lapse is what will add complexity and unknowns to your strategy. Simplistically speaking, a loan is not irreversible, while a withdrawal might be. A loan can be temporary, while a withdrawal may not be. And so on. That said, you can't say take a loan today, surrender the policy and there's no taxable gain -- so that will be the case moving forward in the future. A non-taxable gain today could be a taxable gain in the future. Forgetting about loan vs. withdrawal -- if he simply surrendered the policy today -- would there be a taxable gain? If not, why not just do that? You said he doesn't have a need for the policy and referenced letting it lapse. I would check and make sure that once educated as to the potential -- maybe there is no need, but maybe there would be a want. Good luck!