WL cash value real estate?

[Tahoe Ray]

The PDA (Premium Deposit Account) only works for funding the funding. It's not really part of the policy. You can't borrow against the PDA.

If at all possible, I wouldn't touch the borrowing on a policy until after the 5th year of a well-funded policy.

Generally, to me, a well-funded policy will have 50%+ of the premiums paid... as available cash values by the end of year 5. So, if you did $10,000 a year for 5 years, that's $50,000 in premiums. I'd want to see $25,000+ in available cash values for it to be a well-funded policy.

Agree.

I just mentioned the PDA b/c of the OP. Most people don't say, "I have the money to buy a house, I want to do it in 10 years..." They want to buy a house now.

If someone has saved 100k to get a mortgage on a 500k house, putting it into WL instead of getting a mortgage is just dumb (IMO).

Now, if that person had put 10k/yr into a WL plan for the last 10 years and has close to 100k to borrow from, that strategy can work well.

But as you said, that takes some time.

 

[ATM]

actual horrible discussion with a consumer today on how this can go horribly wrong if the cilent & agent dont micromanage decades down the road.

This is a small case & still had huge nightmare issues.

$100k WL issued in 1999 to a 52 year old with $3700 annual premiums. Client has not paid any premiums since 2005, so the last 16 years of premiums were paid by the policy taking loans to cover the annual premium. so, client only had about $20,000 of their own money into the policy as cost basis, plus the 16 years of premiums that he borrowed from insurance carrier count in basis

In addition, client also took a couple actual small loans on 2-3 occasions.

Late last year, the client figured the policy only had $12k Surrender value, so might as well surrender it. Current agent servicing didnt sell it & is on at least 5th agent since purchase in 1999 that he can remember.

Drum roll......................1099 just landed in his mailbox this week & he owes income taxes on $130,000 taxable gain from the policy. That will be federal taxes, state taxes, impact on taxation on his Social Security checks, he will pay more for medicare in 2023, etc.

How, he asks (as do most agents in our industry). Well, because all those 16+ years of loans & the 3 small loans. Not only do those count, but also all the compounded interest at 7.4%. So, something he only really took out about $10k in loans he received, but the $65k in loans to cover the annual premium & the $60-$70k in charged loan interest count as gains in the calculation of whether you made money on a life policy.

Just imagine if this contract had been a $500k or $1M policy. I am sure the client planned to pay all the premiums & not take loans, but this is what can happen when an agent doesnt service cases after the sale to show the client how they should likely get out of this problem early before it gets ugly ,especially when the agent sees annual loans being taken out to pay the annual premium. Sadly, I dont know if agents see annual statements without proactively going & looking for them. in past years, the agent was copied in paper of what the client received.

So I'm missing something in this. Client's unrealized basis is @$82,000 - two small loans - 12 CSV. Let's say $65K?

His gain would be the interest on the loans over 16%, the little bit of interest earned on his cash value.

I just ran into a policy almost exactly like this, if not this one exactly! It was the insurance company was that WAY off on their calculations.

 

[Allen Trent]

So I'm missing something in this. Client's unrealized basis is @$82,000 - two small loans - 12 CSV. Let's say $65K?

His gain would be the interest on the loans over 16%, the little bit of interest earned on his cash value.

I just ran into a policy almost exactly like this, if not this one exactly! It was the insurance company was that WAY off on their calculations.

Asking carrier for a historical ledger of what they show as payments to basis along with any previous partial surrenders of PUAR + Loans+ loan interest

At a minimum, the basis would be the $3700 x 21 years of payments, so basis should around the number you stated of 78K or 82K if 22 year paid. Doesnt matter if he borrowed from insurance company to make those payments or not, it would count in basis.

Now, we dont have exact numbers yet on the old loans, but know for a fact he borrowed via APL from 2005 to 2021/22. so either 17 or 18 years. $63k-$67k in APL + the loan interest compounding gradually at 7.4% for those 17-18 years. Loan balance on the APL loans would be $140k. So, without any other lump sum loans other than annual APL, would be looking at a taxable gain of $60k-$64k. Another 1-3 actual loans for a total of $15-20k compounding at 7.4% could make up the other $45-$50k

Of course, the client doesnt recall taking any money out or only paying premiums for the 1st 5-6 years & borrowing the last 17-18 years of premiums.

 

[ATM]

There are insurance companies that quickly make a profit from real estate? What's their magic sauce if I might ask?

 

[fed up]

The magic sauce is the SPAM likely to follow on the next post by Leo

 

[pfg1]

Now that a spammer has bumped this up, Allen... did you ever get solid numbers on the case you were talking about?

 

[Allen Trent]

Now that a spammer has bumped this up, Allen... did you ever get solid numbers on the case you were talking about?

client claims that they were issued a corrected 1099 for a gain of about $60k instead of $130k. so, while still an unexpected tax bill, our work to help them likely shaved $15-$20k in direct federal/state income taxes, not to mention this client would have also owed higher Medicare premiums because of the $130k 1099, but at $60k, they wont....I think that is another $3-4k difference.

thanks for asking.......................the real question is whether DHK has really left for good or using an alias on here

 

[pfg1]

Good to hear. That makes more sense.

And fwiw, I have a client that does use his WL cash value all the time for real estate deals. However, he totally understands it (probably better than most agents) and how to properly use it. Plus he has had his policies a while and build up solid cash value before borrowing. AND he pays the interest due, until he pays the loan back off.

There is a group called my family bank or something, that advocates designing policies for using the cash immediately. I know someone who works with them, but haven't ever personally seen what they do.

The bottom line, most agents that sell this type of policy don't understand it enough, and/or aren't around when the client needs help. Cash value is a great tool, but used improperly can hurt.