Why did I get a 1090-R without a distribution?

by Guest » Thu Feb 10, 2011 06:52 am
Guest

I have a single-premium whole life policy that I purchased for $100,000 a few years ago. If I understand it correctly, it has a $450,000 face value, and the additional premium has been applied towards purchasing an additional insurance rider each year. The annual premiums are a little over $15,000 annually, and the premise on which the policy was sold to me was that the annual dividends and extra premium that I paid originally would be sufficient (at least under then-current projections) to not only pay the premiums each year but to build up substantial cash value in the policy as I grew older. The policy was really intended more as an investment vehicle than a life insurance policy, and I don't need any additional insurance beyond the face value amount; I was told that the additional rider is being purchased from the extra single-payment proceeds that I used to buy the policy in order that it not be considered a MEC.

At some point last year, my agent had me fill out a form that authorized the insurer to take out a loan against the policy itself in order to pay that year's annual premium, and then authorized me to use ALIR to pay back the loan. (I confess that I did not and perhaps still do not understand this transaction.) In any event, I received a Form 1099-R this month indicating that I received a distribution equal to the amount of my annual premium payment plus the interest on the loan. Of course, I never received any cash distribution, so I am now looking at having a tax liability on $15,000 plus of phantom "income," which does not please me.

Can anyone explain to me why this was considered a taxable event and what I should be doing in the future to make sure that it does not happen again? Did my agent advise me incorrectly in using a loan against my policy in order to pay the annual premium? Was/is there some other alternative for paying the annual premium that should have been used and that should be used in the future?

Thanks in advance.

Total Comments: 64

Posted: Wed Feb 16, 2011 08:19 pm Post Subject:

I'll give you 50% credit on this one because you hadn't a clue what the case was about. The plans in question were sold as "Investments with a life insurance rider." The court frowned on this terminology.



Ouch. There is a serious problem with that terminology.

Posted: Wed Feb 16, 2011 08:46 pm Post Subject:

Let me get this straight: It is your belief that a Variable Universal Life policy is either a level or decreasing renewable term policy coupled with [an] investment?
Who gets to decide which type of term policy (level/decreasing/YRT) is used within the VUL plan?



I'm simply referring to the fact that the cost of insurance inside of a UL policy is based upon the net amount at risk. If one chooses a death benefit that is the original death benefit + the cash value, the cost of insurance will be based upon an amount that stays level.

If the death benefit is one that remains level, the net amount of risk will fluctuate. Ideally over time, this will decrease. My statement that it will decrease is certainly incorrect when it comes to VUL. It will fluctuate is a more accurate statement.

Posted: Wed Feb 16, 2011 08:52 pm Post Subject:

I have personally attended life insurance seminars (A.L. Williams, Primerica, WFG, and others) where there was almost a cultish atmosphere. These people are absolutely steadfast in their belief that term insurance is for everyone and no one should ever own a cash value product. Some of these people would rather fight than admit they are wrong. Professors of Insurance Law and Theory, actuaries, MBAs, Insurance SIU members and investigators - they believe we're all wrong and they're right.



You are awfully confused. Primerica is certainly the "term insurance is for everybody" crowd. However, WFG is very much into pushing VUL.

I have no idea how or why you would have me lumped in with these guys. I like cash value insurance. Do you have any idea why I am so negative towards VUL? I'm not nearly as negative towards VL.

Posted: Thu Feb 17, 2011 12:27 am Post Subject:

There is a point that you seem intent to completely ignore. Sure, I don't like VUL. I don't like the investment risk inside of an insurance product. I think that M&E expenses that increase as the insurer's actual risk go down is complete B.S.



As I'm sure you know, the distinguishing feature of a VUL is that premiums may be allocated to one or more investment accounts, known as “separate accounts.” Each of these separate account resemble a mutual fund in its operation.

Most insurers that solicit VUL’s typically have from ten to twenty choices of separate accounts. As with mutual funds, operating expenses and investment management fees are assessed against the accounts as asset charges, in most cases, these amounts can be rather large.

I do not understand why you sold an elderly woman (in less than even standard health) a VUL product and greatly restricted - if not eliminated its true potential.
As I mentioned previously, there may be a suitability issue in this particular case. That, of course is an SEC issue.

Here are a few of the ways in which [I believe] a VUL operates. If I'm wrong, please let me know:

* A premium is paid. The first premium places life insurance in effect for a “Specified Amount,” which defines the death benefit.

* A percentage deduction is made from each premium to cover taxes, premium collection expenses, and sales and other start-up costs. Typical premium “loads” total about 5% or so, but I have seen them as high as 11%. (State premium taxes and federal taxes usually assessed against premiums average perhaps 3%, a significant and little understood offset to the tax advantages of cash value life insurance.)

* The balance of the premium is allocated to separate accounts as selected by the policy owner. Daily deductions are assessed against the separate accounts for investment management and for the M&E charge.

* Monthly charges are assessed against the separate accounts for administrative costs, usually $5 to $10, and for all insurance charges.

* Policy values change daily with the market.

* A surrender charge is stipulated in the contract, generally a function of the Specified Amount, but also varying by other factors. (On larger VUL’s, surrender charges can be in the tens of thousands.) The surrender charge declines to zero over a period ranging from 10
to 20 years. (Not infrequently, it increases before decreasing, and it often may remain level for five to ten years.) Although this charge is assessed only on full or partial surrender of the policy (or a reduction in Specified Amount) within the surrender charge period, do not
assume it may be ignored if you intend not to surrender. Its function is to allow the insurer to recoup sales and other costs during the surrender charge period that the explicit charges such as premium loads do not cover.

* A “low-load” insurer’s VUL would have no surrender charge. Low-load insurers sell direct to the public or through fee-only financial planners, and they pay no agents’ commissions. They of course have selling expenses, and they may pay low commissions to marketing groups.

Ouch. There is a serious problem with that terminology

.

You are correct.

I'm simply referring to the fact that the cost of insurance inside of a UL policy is based upon the net amount at risk

.

Correct again.

If one chooses a death benefit that is the original death benefit + the cash value



Are you referring to what is usually called Death Benefit Option B? The more expensive of the two options?

the cost of insurance will be based upon an amount that stays level



Would you please expand on this a bit for me? I'm not sure I understand what you mean. Isn't the cost of insurance based on a number of factors including a company's net amount at risk?

If the death benefit is one that remains level, the net amount of risk will fluctuate.



Are you referring to Death Benefit Option A?

What specifically would cause the net amount at risk to fluctuate?

Ideally over time, this will decrease. My statement that it will decrease is certainly incorrect when it comes to VUL.



You're confusing me again. If your first statement was incorrect, why didn't you just delete it before hitting the "send" button?

However, WFG is very much into pushing VUL.



Do you work for WFG?

Do you have any idea why I am so negative towards VUL?



No, enlighten me.

I'm not nearly as negative towards VL.



I assume you mean UL. If you aren't "nearly as" negative towards UL (assuming this was a typo) does that mean you are still "somewhat" negative about it? For example: UL blows but nearly as bad as VUL?

Do you sell the UL product with any sort of regularity?

Posted: Thu Feb 17, 2011 04:50 pm Post Subject:

As I'm sure you know, the distinguishing feature of a VUL is that premiums may be allocated to one or more investment accounts, known as “separate accounts.” Each of these separate account resemble a mutual fund in its operation.




Let me be slightly argumentative here as usual. What you are describing is a feature of VUL, but not "the distinguishing" feature. I say that because it is also true of variable whole life.

Posted: Thu Feb 17, 2011 05:02 pm Post Subject:

I do not understand why you sold an elderly woman (in less than even standard health) a VUL product and greatly restricted - if not eliminated its true potential.
As I mentioned previously, there may be a suitability issue in this particular case. That, of course is an SEC issue.




Why are you looking at the "less than standard health" as a negative. This is a positive. As I mentioned, all of the offers that we received were substandard except one. We went with the company that gave her standard rates. Part of the reason why we went with the insurance is that she certainly appeared to receive an offer that was better than deserved.

She didn't/doesn't want investment risk. This means that subaccounts that can lose value can't be used. The reason for using VUL was because the fixed account in the VUL pays a greater guarantee than what she could get in a UL.

The goal of the purchase was to guarantee a certain amount of money if she died before 95. This did it less expensively than any alternative.

Posted: Thu Feb 17, 2011 05:08 pm Post Subject:

What specifically would cause the net amount at risk to fluctuate?




Yes, I was referring to the different death benefit choices which are typically, but not always, called "option 1" and "option 2".

To answer your question, here is an example:
George has a $500,000 VUL policy with a level death benefit. His cash surrender value is $100,000. The net amount at risk is $400,000. If the investment value increases to $150,000, the net amount at risk decreases to $350,000.

Posted: Thu Feb 17, 2011 05:16 pm Post Subject:

You're confusing me again. If your first statement was incorrect, why didn't you just delete it before hitting the "send" button?



It was careless on my part and I didn't notice it until I read it again. You've never made a mistake? I have no problem with admitting mistakes.

Do you work for WFG?


No.

Posted: Thu Feb 17, 2011 05:28 pm Post Subject:

Why I am negative towards VUL:
Primarily it is the cost and the cost structure. The costs tend to be obscene. What's my definition of obscene. An example would be a 5% sales load with no break points. Another example would be insurance costs that are triple what one would pay with a 30 year level term policy.

Another example would be M&E charges. The less risk that the insurer has, the more that they charge in M&E. How does this make sense? Here's an example assuming a 1% charge and a $1,000,000 policy with a level death benefit.

Jim has no cash value in his policy. The net amount at risk is $1,000,000. His M&E charge is $0.

His cash value grows to $400,000. The net amount at risk is now only $600,000. His M&E charge is now $6,000.

It also has the same problem as any UL policy. The cost of insurance is based upon attained age. This greatly increases the chance of lapse at older ages.

Posted: Thu Feb 17, 2011 05:35 pm Post Subject:

I assume you mean UL. If you aren't "nearly as" negative towards UL (assuming this was a typo) does that mean you are still "somewhat" negative about it? For example: UL blows but nearly as bad as VUL?

Do you sell the UL product with any sort of regularity?



I didn't mean UL. I meant VL. Variable Life which is Variable Whole Life. I like it more because the insurance costs are based upon age of issue an not attained age. I've actually never used it. The only company that I know of that sells it is Northwestern Mutual and I'm not an NML rep.

I do use some UL. However, it is almost always done on a secondary guarantee basis. It is the functional equivalent of level term insurance until age 120 (or whatever age we use). The cash surrender value will almost always be zero. The insurance will lapse once a premium is missed.

The majority of my sales are term, WL, or a combination of both.

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