by cboozb » Sun Jul 18, 2010 05:20 pm
I have a single-premium whole life insurance policy that I took out a loan against to use to help pay for my son's college education. Do I have to pay that loan back or can I surrender the policy?
Posted: Sun Jul 18, 2010 09:16 pm Post Subject:
Whether you pay back the loan out of your pocket or not, you will still be paying back the loan.
Posted: Mon Jul 19, 2010 01:02 am Post Subject:
Do I have to pay that loan back or can I surrender the policy?
Whether you pay back the loan out of your pocket or not, you will still be paying back the loan.
doesn't really answer the question, does it?
Neither policy loans nor the interest that accrues ever need to be repaid. If unpaid, those amounts will be deducted from the death benefit or the surrender value of the policy. However, depending on when you created your single-premium policy, it may actually be considered a "Modified Endowment Contract" which would result in a 10% early withdrawal penalty tax if you are under age 59-1/2 when you surrender the contract. Plus any portion of the loan that represents gain would be subject to ordinary income tax.
Policy loans and unpaid interest can adversely affect a Universal Life policy and cause it to lapse prematurely, also with the potential for income tax liabilities. How "tax free" would that loan be?
Posted: Mon Jul 19, 2010 01:36 am Post Subject:
I have a single-premium whole life insurance policy that I took out a loan against to use to help pay for my son's college education. Do I have to pay that loan back or can I surrender the policy?
To answer your question you can surrender the policy if you want to. You can also leave the loan to accrue interest, which may or may not cause the policy to eventually lapse. You should consult an agent, or at the very least the customer service department at your insurance company.
Posted: Sat Aug 21, 2010 01:18 pm Post Subject:
hi,
first of all you consult your insurance agent.and ask about query and second
way to call help line no. to your insurance policy company.
Posted: Thu Sep 09, 2010 03:31 am Post Subject: whole life loan
I have a $60,000 loan from my whole life policy with interest due each year of $4,000. If I don't pay the interest, what is the income tax? What is the modified endowment law if I am over 60? Can I convert the policy to a different one? What is query?
Posted: Thu Sep 09, 2010 05:39 pm Post Subject:
If I don't pay the interest, what is the income tax? What is the modified endowment law if I am over 60?
First, there is no income tax on life insurance policy loans as long as the policy does not lapse. The interest you "pay" or that "accrues" is also not tax deductible (it was prior to the Tax Reform Act of 1986). If you fail to pay the interest, it is added to the loan principal, and then bears interest, too.
$4000 annual interest on a $60,000 loan is very high (almost 7%). Most companies don't charge quite that much. But if you have not been paying the interest, and it is being added to loan principal, then your $60,000 loan could be up to almost $80,000-$90,000 which would make more sense.
If your policy is not already a "modified endowment contract", the outstanding loan is unlikely to cause it to become one. If your policy is a mondified endowment and you take a loan, there are income tax implications, not the least of which is the pre-age 59-1/2 penalty tax. After age 59-1/2, the tax implications do not disappear, but the tax penalty does. That's the only difference when it comes to taxation of a modified endowment. Only the beneficiary of a modified endowment would receive money income tax-free.
The policy loan and unpaid interest is deducted from the death benefit when paid to the beneficiary. But if at any time prior to the insured's death, the loan and unpaid interest exceeds the current cash value of the policy, the policy will lapse (no collateral to cover the debt). In that case, there could be an additional tax implication if more money, including unpaid interest, has been borrowed from the policy than the cost basis.
Can I convert the policy to a different one?
A 1035 exchange may always be made from one policy to another, as long as you can qualify for the new policy. However, if your current policy is a MEC, the new policy will also be a MEC -- you cannot escape that dreadful consequence other than cancelling the policy, which will probably still leave you exposed to an income tax liability.
What is query?
As used above, nothing. The poster is probably not a native speaker of English, and uses the term incorrectly. In its normal use, to query is to question, a derivative/root of "inquiry".
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