What banks allow a term life policy to be used as collateral??

[myinsurebiz]

Do you have an Agent to call?

Are there any financial institutions that allow them to be assignees on term life policies?


I have a 20 year term, convertible, life policy that I am considering assigning to a bank/financial institution in order to access a portion of the face value of the policy.


The policy is one year old AND is still within the 2 year contestability period.


To my knowledge, Indiana does NOT have any rules against this type of transaction and my policy doesn’t prohibit it as long as the policy is paid and current, no matter if it’s within the 2 year contestability period or not.


I have heard that some banks/financial institutions will use them as collateral by becoming an assignee on the policy for the amount the insured has requested. I haven’t read where the insured makes any payments but it just an accelerated payment and when the policyholder passes, the bank gets their portion and the remaining amount, if any, goes to the beneficiaries.


Can anyone advise if this is still done and what institutions or investment companies still do this?


I am NOT interested in doing a life settlement and am not willing to sell my policy for pennies on the dollar and if there’s broker fees, it would be worse. The life settlement process, itself, feels predatory which is why I would rather do this type of transaction with a reputable financial institution.


The “policy auctions” they have are very strange. When I asked what information of mine is furnished to these “investors” to ensure the best offer, it was invasive, IMO. The life expectancy report is all they care about.


I am considered terminally ill and on disability so I don’t qualify for traditional loans.

 

[bill3173]

Again , have not seen that with terminal illness acceleration.

It's possible that they misunderstood the ridiculously high "fees" that some carriers charge for accelerating the benefit as taxes.

 

[scagnt83]

Doesn't the DB become taxable when the policy is accessed prior to death? Seems I heard a story from an agent who had a client that needed money to cover an experimental medical procedure and advised client to access his policy since he was within 6 months of death without the medical intervention. He paid for and survived the operation with policy benefits but still died a year later and the estate was hit for the income tax on the early benefit.

Typically, no, it doesn't, but it can and will depend on the specifics. In the situation you described, there must have been something else going on. Now, interestingly enough, you said the estate was hit for the income taxes -- are you sure it was on the early/access/accelerating of the DB? Why the life insurance was left to the estate is another question (not a very good move in this, or in most situations), but perhaps the DB was left with a settlement option which generated an income tax liability. Also, someone who had no idea what they were talking about could have told the executor/executrix/representative something which was incorrect.

That said, obviously, many life insurance companies have policies which offer an option or options of "accelerating" a portion of, and accessing the death benefit -- if you are terminally, perhaps, chronically ill, etc., and you meet the various conditions. In these cases, if you are diagnosed with a terminal/chronic illness and access or accelerate the death benefit -- again, typically, it’s not taxable. In a tax context, it's simply being viewed as you being "the beneficiary" to a life insurance payout. However, it all depends on the details and specifics of the situation. I've not had one yet where it was taxable.

Never seen an accelerated death benefit for terminal illness be a taxable event.

Is is possible you are thinking instead of an accelerated death benefit for chronic illness/LTC. Those are also normally tax free, but if a client filed an acceleration claim that exceeded the monthly IRS per diem for care, they would be taxed on the amount over the allowed monthly per diem by IRS that year. I believe 2023 is around $12,700 per month for chronic/LTC. So, is it possible in the example you mention that a client took an acceleration of say $100k, but then only needed 6 months of care, thus causing around $35-40k in taxable benefit?

Again , have not seen that with terminal illness acceleration.

@Nurse D what Ray said. I have helped at least a half dozen clients access a portion of their death benefit amount through the ABR.

In general you or your agent contact the claims department of the company, they send you a form for your doc to fill out and sign a HIppa for you to sign and all is returned to the company. In a week or two it is reviewed and a decision is made. Note: I do not know how being in the contestable period will affect this.

Also check if your policy has disability waiver or premium and now would be a good time to verify that your beneficiary(s) are worded correctly.

Your agent should help you with all of this.

Perhaps it was a MEC?

Ive had carriers say MEC status does not matter since its DB being advanced. But an agent told me a few months ago a carrier told him it could be taxable if a MEC.

I think its a huge grey area with no clear law dictating it.

 

[Allen Trent]

Perhaps it was a MEC?

Ive had carriers say MEC status does not matter since its DB being advanced. But an agent told me a few months ago a carrier told him it could be taxable if a MEC.

I think its a huge grey area with no clear law dictating it.

interesting, had not heard that & it wouldnt make sense. As you mention, death benefit of a MEC isnt taxable.

I bet bill3173 is right that a large carrier discount fee on the benefit was assumed to be a reduction due to taxes witheld. An agent that doesnt understand on terminal illness or discounted chronic illness work could explain away a $250k claim causing $270k-$300k face reduction as "tax witholding"

 

[PrivClientSG]

Perhaps it was a MEC?

Ive had carriers say MEC status does not matter since its DB being advanced. But an agent told me a few months ago a carrier told him it could be taxable if a MEC.

I think its a huge grey area with no clear law dictating it.

No, I don't think so. Even with a MEC -- even specifically when a policy is issued after June 20, 1988, OR...the policy fails to meet the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) 7-pay test -- the death benefit on a MEC is not taxable. Meet all three criteria and trigger MEC status, and the death benefit is still not taxable. If you are accellerating the death benefit, and accessing the death benefit during the lifetime of the insured, most carriers will classify that as "death benefit" -- and will report same -- on a Form 712.

While on a MEC, the gains are taxable as ordinary income when taken as a withdrawal, and you have LIFO reporting, the cost basis is not taxable.

Regardless, this is something that one should discuss with the carrier PRIOR to accessing death benefit monies. Their tax department, advanced markets department, or legal, would be able to tell you exactly how they will report this. Generally speaking, receiving death benefit monies as part of any accelerated benefit -- will be treated as death benefit -- and will not be taxable. Yes, amounts paid are subject to the same limitations as LTC benefits, but that law may have changed to some extent. The threshold used to be $330 per day in benefits. Section 101(g)) does speak to the excess being included in income, although it also references (without regard to Section 72) if the insured is terminally ill, when a payment is made and falls under Section 101(g), the monies are not taken into account for these purposes.

Not that I would recommend it to a client -- but if an insurance reported it as taxable income, I'd challenge it with the IRS. Easy for me to say, LOL.

 

[scagnt83]

Regardless, this is something that one should discuss with the carrier PRIOR to accessing death benefit monies. Their tax department, advanced markets department, or legal, would be able to tell you exactly how they will report this.

Are you sure about that? Most illustrations and carrier material Ive seen, have vague wording about consulting a tax professional and do not speak to the taxation of the Accelerated Benefits. Ive even spoken to advanced sales dept before at a few. Its been a while since I investigated all that though.

It's never been challenged, on either side. But the law is not clear from what I have found via my research.

My question is always "do you issue a 1099? or other tax form? when it's triggered." So I get what you mean by reporting it or not. But they still give a long disclaimer that taxes could still possibly be owed.

Other than an audit, that is the only way the IRS is going to know about it. So to me, that is the most important thing first and foremost, how does the carrier treat it regarding IRS reporting.

At the end of the day its on the CPA to ensure all taxes are properly paid. All we can do is say if the carrier sends any type of tax forms.

Its not something I get into the weeds with in front of a client. But it has always amazed me how much grey area there is in our tax code.

 

[PrivClientSG]

Are you sure about that? Most illustrations and carrier material Ive seen, have vague wording about consulting a tax professional and do not speak to the taxation of the Accelerated Benefits. Ive even spoken to advanced sales dept before at a few. Its been a while since I investigated all that though.

It's never been challenged, on either side. But the law is not clear from what I have found via my research.

My question is always "do you issue a 1099? or other tax form? when it's triggered." So I get what you mean by reporting it or not. But they still give a long disclaimer that taxes could still possibly be owed.

Other than an audit, that is the only way the IRS is going to know about it. So to me, that is the most important thing first and foremost, how does the carrier treat it regarding IRS reporting.

At the end of the day its on the CPA to ensure all taxes are properly paid. All we can do is say if the carrier sends any type of tax forms.

Its not something I get into the weeds with in front of a client. But it has always amazed me how much grey area there is in our tax code.

Am I sure that every carrier in the marketplace can and will be helpful? No, of course not. However, there are many that are. I am sure that this is not arbitrary as it's not done manually. In addition, I would not do any due diligence or make any decision based upon an illustration. I would call the departments I referenced and ask them, request it in writing, and see if you can get a 712 calculation (if applicable). Yes, ask about a 1099 or other tax form, without question.

In the end, as with anything, it all comes down to having the right professionals around you to advise you. I haven't looked at the updated reform, tax law change, etc., on this, but if it hasn't changed, then I think it's clear. Would I put it in writing? No, of course not. But I would push the carrier to do so, and absolutely get the accountant on the phone with the right person at the carrier. Thanks.

 

[scagnt83]

Am I sure that every carrier in the marketplace can and will be helpful? No, of course not. However, there are many that are. I am sure that this is not arbitrary as it's not done manually. In addition, I would not do any due diligence or make any decision based upon an illustration. I would call the departments I referenced and ask them, request it in writing, and see if you can get a 712 calculation (if applicable). Yes, ask about a 1099 or other tax form, without question.

In the end, as with anything, it all comes down to having the right professionals around you to advise you. I haven't looked at the updated reform, tax law change, etc., on this, but if it hasn't changed, then I think it's clear. Would I put it in writing? No, of course not. But I would push the carrier to do so, and absolutely get the accountant on the phone with the right person at the carrier. Thanks.

They wont put it in writing. They will put in writing how they treat it, but with a huge disclaimer that the IRS might feel differently.

Ive tried with multiple carriers (major carriers with high quality advanced planning departments, including a few major mutuals).

Anything they put in writing, has a huge disclaimer about "to the best of their knowledge" , "as we interpret the tax code", "from our understanding". But some of the other disclaimers that went along with it show how much of a grey area it is.

Essentially they say "we feel its this way. we treat it this way. but we could be wrong."

A Tax Attorney at a major mutual told me it has never been ruled on by the IRS. Everything is an "assumption" that it would be treated that way if ever questioned by the IRS.

That was apx 5 or 6 years ago. Perhaps the IRS has clarified and issued guidance since then.

 

[Allen Trent]

They wont put it in writing. They will put in writing how they treat it, but with a huge disclaimer that the IRS might feel differently.

Ive tried with multiple carriers (major carriers with high quality advanced planning departments, including a few major mutuals).

Anything they put in writing, has a huge disclaimer about "to the best of their knowledge" , "as we interpret the tax code", "from our understanding". But some of the other disclaimers that went along with it show how much of a grey area it is.

Essentially they say "we feel its this way. we treat it this way. but we could be wrong."

A Tax Attorney at a major mutual told me it has never been ruled on by the IRS. Everything is an "assumption" that it would be treated that way if ever questioned by the IRS.

That was apx 5 or 6 years ago. Perhaps the IRS has clarified and issued guidance since then.

exactly--that is why you see illustration & other items with disclaimers that say "may be taxable, consult attorney", but the marketing department of those same carriers send their wholesalers out there sharing everything is tax free all the time on life policies. The best ones I love is the life insurance is only way to get tax free income other than roth...........well, yeah, its tax free because you are taking a loan. I can do that with my paid off house too. I can get a bank to give me a loan against it & not be taxed on that loan income............that is exactly what is happening with a loan from an insurance company where they take a collateral position against my policy. (sure, I can get my premium cost basis out tax free too--FIFO)

 

[scagnt83]

exactly--that is why you see illustration & other items with disclaimers that say "may be taxable, consult attorney", but the marketing department of those same carriers send their wholesalers out there sharing everything is tax free all the time on life policies.

I get the paradox there.

Straight from a contract about Terminal Illness Rider: Exercising this benefit could be a taxable event. ADB payment is intended to qualify for favorable tax treatment under IRC 101(g).

I have never seen anything definitive from a carrier.

They will make definitive statements about all kinds of policy taxation issues, and of course still include the disclaimer about consulting with accountant.

But they give a vague statement about these, combined with a long disclaimer about "their interpretation" and flat out saying "it could be taxable".

Huge difference there imo.