by Guest » Sat Dec 04, 2010 06:07 pm
My father in law bought 5 single premium life policys from State Farm in 1986; one each for three grandchildren, one for himself and one for his wife. His agent told him that he could borrow from these policies and not have to pay it back and that state farm would alert him is he was borrowing too much. The annual reports were sent to him even after the grandkids turned 21. He died in 2005 and later after the reports started going to the owners we realized that the policies were about to lapse, which means high capital gains taxes for each policy holder. We started directing dividends to the loan balances (under SF recommendation) but this wasn't enough. Does SF share blame due to: 1. not recommending to direct dividends very early in the process. 2. not insuring that the reports were getting to the rightful owners. 3. local agent telling him that he would not have to repay loans, thereby prompting him to borrow more. 4. SF did notify one of the grandchildren recently that it appeared that his loan would lapse over the next few years, even with dividend paying loan. The grandfather went through several illnesses during this time and he also kept his files locked up in his office at his home.
Posted: Sun Dec 05, 2010 07:40 am Post Subject:
While it certainly can feel as though the insurance company should have done more, it's highly unlikely you'll be able to prove any sort of negligence on State Farm's behalf.
Ususally directing dividends to repay loans shortens the length of time you have until the policy lapses (using them to purchase paid up additions generally grows more cash value in the policy to offset the loan).
It won't be capital gains tax, it'll be income tax. Depending on how this has been working for the past several years, using those dividends to repay policy loans could have been bringing the cost basis down, and increasing the taxable consequences (sorry to throw more fuel on the fire).
Another classic example of a strong need to have an agent reviewing these things for you. This couls have been prevented.
What you really need is to get all these policy together and have an agent look at them. That agent might be able to come up with some advice on how you can go about avoiding certain negative consequences. You need someone who knows what they are doing. Forget about poking around the internet looking for answers, you don't know enough to even begin to know what your doing (sorry, but it's that realization that might help you here).
Depending on where you are located I might be able to give you a referral to an agent that might be able to help you.
Posted: Sun Dec 05, 2010 10:17 pm Post Subject:
What you really need is to get all these policy together and have an agent look at them
If you, or any of the owners, are in California, I am happy to be able to help -- no charge. As BNTRS has written, there is no "capital gains" tax liability, only the possibility of an income tax liability.
If there is a tax liability, it will only be assessable on the amount of gain credited to the policy in excess of the cost basis. There are also some legal precedents that might be useful in asserting a claim against State Farm for any "damages" incurred.
Posted: Mon Dec 06, 2010 05:15 am Post Subject:
If you, or any of the owners, are in California, I am happy to be able to help -- no charge.
You can take his word without a doubt. Max has contributed so much towards the growth of our community in the recent times.
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