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

[Allen Trent]

It is tax-free money that is not required to be paid back.

isnt it paid back at lapse/surrender or death? The carrier has an asset on their books of the outstanding loan. At time of lapse/surrender or death, they go back to the clients cash value or death benefit & collect the money they are owed.

For the last 10-15 years with bank rates at 2-4%, wouldnt some of those clients that are being charged 5-7% on loans from old policies have better off borrowing tax deductible bank money (assuming they could qualify for the bank loan, etc). Again for those that cant qualify for a bank loan or rate have jumped now on bank loans.

 

[scagnt83]

isnt it paid back at lapse/surrender or death? The carrier has an asset on their books of the outstanding loan. At time of lapse/surrender or death, they go back to the clients cash value or death benefit & collect the money they are owed.

Technically, yes. But the policy has already accounted for it at that point regarding Cash Value and Death Benefit. If someone has a $100k loan balance, and a current DB of $400k; the bene gets $400k.

Notice I say current DB, not original DB. Adjustments are made when the Loan comes out.

From a technical standpoint, the Loan is paid back upon death. But its all on paper, and a wash for the Bene.

If you run illustrations showing this scenario you can see how the policy accounts for it and what the adjusted DB is.

I know a long time ago some carriers would send statements showing the Gross DB and Net after loan DB, but it was extremely confusing to consumers. I have not seen consumer level accounting like that ever outside of old statements on old ULs.

 

[scagnt83]

For the last 10-15 years with bank rates at 2-4%, wouldnt some of those clients that are being charged 5-7% on loans from old policies have better off borrowing tax deductible bank money (assuming they could qualify for the bank loan, etc). Again for those that cant qualify for a bank loan or rate have jumped now on bank loans.

Depends. Some of them maybe. But probably not.

For the past 15 years, most participating Loans have seen a positive arbitrage on the Loan/Credited Rate.

So you are asking if they would have been better off with a 2% loss on those funds.... vs. a 2% gain on those funds.... or more with IUL.

Even with non-participating Loans, most are set up to be a wash on the policy. Meaning they net 0%.

So you are asking in that scenario if they would have been better off with a 2% loss.... vs. a 0% loss.

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That is not even taking into account IF they want to pay it back.

If they are retirement loans, most dont pay them back.

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Dynamically different options.

One is a hard loss. Other is a net 0%, or possibly a net gain (historically in most years).

So no, they would not have been better off.

Only scenario they would have been better off is if they wanted to treat it like a checking account... which imo, is the main reason to get a LOC based on policy values.

 

[Allen Trent]

Technically, yes. But the policy has already accounted for it at that point regarding Cash Value and Death Benefit. If someone has a $100k loan balance, and a current DB of $400k; the bene gets $400k.

Notice I say current DB, not original DB. Adjustments are made when the Loan comes out.

From a technical standpoint, the Loan is paid back upon death. But its all on paper, and a wash for the Bene.

If you run illustrations showing this scenario you can see how the policy accounts for it and what the adjusted DB is.

I know a long time ago some carriers would send statements showing the Gross DB and Net after loan DB, but it was extremely confusing to consumers. I have not seen consumer level accounting like that ever outside of old statements on old ULs.

If the policy has already accounted for the loan being deducted,does a UL/IUL/VUL not get charged for the COI of the real death benefit listed on the policy? Also, doesn't the full cash value still continue to earn interest or dividends (except in direct recognition that gets a lower dividend on money encumbered by a collateral assignment to the carrier)?

 

[Allen Trent]

Depends. Some of them maybe. But probably not.

For the past 15 years, most participating Loans have seen a positive arbitrage on the Loan/Credited Rate.

So you are asking if they would have been better off with a 2% loss on those funds.... vs. a 2% gain on those funds.... or more with IUL.

Even with non-participating Loans, most are set up to be a wash on the policy. Meaning they net 0%.

So you are asking in that scenario if they would have been better off with a 2% loss.... vs. a 0% loss.

---

That is not even taking into account IF they want to pay it back.

If they are retirement loans, most dont pay them back.

----

Dynamically different options.

One is a hard loss. Other is a net 0%, or possibly a net gain (historically in most years).

So no, they would not have been better off.

Only scenario they would have been better off is if they wanted to treat it like a checking account... which imo, is the main reason to get a LOC based on policy values.

Completely understand on those with wash loans & very low loan rates, but there are many existing policies written 20-40 years ago with loan rates of 5-7% . If a person could have borrowed at 3% from bank in 2020 & they are in a 25%-35% combined tax bracket, net loan cost 2%, wouldnt it have been better to take $100k bank loan that would take 35 years to compound to $200k loan (if no payments required in theory) than a loan that would double from $100k to $200k in 10-15 years at 5-7% policy loan rate. Wouldnt the policy have continued to earn interest or dividends in either case.

Currently sold policies have much,much better loan than some from decades ago

 

[scagnt83]

If the policy has already accounted for the loan being deducted,does a UL/IUL/VUL not get charged for the COI of the real death benefit listed on the policy? Also, doesn't the full cash value still continue to earn interest or dividends (except in direct recognition that gets a lower dividend on money encumbered by a collateral assignment to the carrier)?

Interesting question. Honestly Im not sure about the COI. I will look at that later today when Im running IUL illustrations.

Yes, the full CV can still continue to earn the full credited rate, minus the loan rate.

 

[scagnt83]

Completely understand on those with wash loans & very low loan rates, but there are many existing policies written 20-40 years ago with loan rates of 5-7% . If a person could have borrowed at 3% from bank in 2020 & they are in a 25%-35% combined tax bracket, net loan cost 2%, wouldnt it have been better to take $100k bank loan that would take 35 years to compound to $200k loan (if no payments required in theory) than a loan that would double from $100k to $200k in 10-15 years at 5-7% policy loan rate. Wouldnt the policy have continued to earn interest or dividends in either case.

Currently sold policies have much,much better loan than some from decades ago

The CV still earning full credited interest is the other big advantage of a LOC on the policy.

However, to my knowledge, those require a payment schedule.

But you are leaving out the loan repayments.

LOC is paid to the bank. WL is paid back into the policy. You need to look at the NET values after the Loan is paid back.

Sure the CV is still accumulating fully. But you are making these side payments out of other funds to the bank. So that must be accounted for in the overall personal balance sheet.

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Its hard to speak about older policies since there is so much variance with them all. I recently saw a 60 year old SF WL that had a 4% fixed loan rate on it with a 5% dividend. But you are correct that there are many old policies with pretty high loan rates on them.

I should have specified that I was speaking about polices sold within the last 15 years or so.

If they are looking at an 8% loan rate and a 5% credited rate, then yeah, LOC would likely be better.

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Maybe I will spreadsheet it out and do a comparison when I have time. You have my curiosity going on all this.

 

[PrivClientSG]

"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."
I don't think this is correct.
If you have gains on your policy whether you access them via withdrawal or loan you will incur tax.
If what you are saying is correct than you should fund past the MEC limits and access your money via loan to avoid tax, I don't think that is an option.

I didn't mention loan, nor was I saying otherwise. I only specified withdrawal, because that was the context that I was speaking to. Nothing more. I was simply saying that the gains are:
1) taxable as ordinary income, and
2) there is LIFO reporting, and
3) the cost basis is not taxable.

The discussion has digressed obviously. What bank will allow a term policy to be used for collateral? Now accelerated death benefits and MEC's? LOL. I've had numerous clients access death benefits via accelerated/terminal illness/etc. -- and the audit period has come and gone. Every single time the position was taken that the monies were tax free, and there has not been one case where that ended up not being the case. Just my experience. If it happens again, I call in the troops and proceed with caution. Like always, LOL.

 

[Tahoe Ray]

The discussion has digressed obviously. What bank will allow a term policy to be used for collateral? Now accelerated death benefits and MEC's? LOL

Politics is up next lol.

 

[PrivClientSG]

Politics is up next lol.

LOL.