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Nelson Said:

How is the loan value of a whole life insurance policy determined?

We Answered:

It's often a percentage of the total cash surrender value of the policy (not the death benefit), such as 90%. For example, a $50,000 policy might have a cash value of $5,000. So the maximum loan available might be $4,500. But you'll have to know the terms of the policy to be sure.

Raul Said:

At age 29, is it better to take out a loan on my life insurance policy or surrender the policy?

We Answered:

First off, Suze Orman is a bit of a quack. She's a TV personality, not a legitimate financial advisor (same goes for Dave Ramsey, Jim Kramer and any of the other infomercial guru's that are just trying sell their newest book rather than be an actual advisor in the real world). While some of her GENERAL ideas are ok (debt snowball ideas, paying down debts, etc), anyone that solely promotes a one size fits all approach should NEVER be trusted as every situation is different. Feel free to read up on her stuff, but DEFINATELY get opinions from others as well! The financial industry is HEAVILY regulated. If something isn't legit, the governement steps in and kibosh's it. If whole life is a scam as many of these quacks claim, it would be banned...instead, they are still around decade after decade. Heck in many countries, Whole Life (Universal Life) policies are even endorsed by governments as a legal and legitimate tax shelter. Why would a government take bold steps to write a 'scam' into their own tax laws?

It's extremely difficult to answer this question without knowing what type of policy it is that you have. If you have the ability to take out a loan against it, it's obviously some form of whole life, but is it universal life? regular whole life? Limited Pay Whole Life (you pay for say 20 years and then it's paid up and you keep the insurance?). If it's limited pay, perhaps in a couple years it will be completely paid up, so why would you cancel something that will be 'free' in a couple years? If it's universal life, perhaps there are some great tax sheltering options within the policy that you could use as a long term investment vehicle? Is the policy paying you dividends? If so, where are the dividends going? Perhaps the dividends are just accumulating in a side account, and you could change that to go towards paying the premiums, or paying back the loan (meaning less out of pocket expenses to you?), or just withdraw the dividends to put towards whatever you need the money for?

Since this policy was taken out when you were 11 years old I would assume the premiums are ridicuously cheap compared to if you were to purchase a new policy at age 29, or 35 or whenever.

Many policy loans offer the ability to NEVER have to pay them back...the loan just gets deducted from a future claim.

Another risk to cancelling the policy to take the cash value flat out, would be your own insurability. Let's say you cancel it today and next year you get diagnosed with cancer? Slip and fall at work and have some kind of head trama? Maybe get diagnosed with diabetes or some other common disease these days that would make you uninsurable?

A risk to keeping the policy would be the cost. Maybe it's cheaper to get term? Maybe you don't even need insurance and it's a waste of money.

Your best bet is to meet with the company that the policy is with to find out all the benefits of keeping it with them and taking out the loan. Then find a couple good brokers and get them to assess the situation for you to see what their thoughts are and see if there's a cheaper situation.

If you are still in doubt after getting advice from the company and some brokers, just take the loan. It's far easier to reverse that decision if you end up making a wrong one (just pay back the loan to make it better), than it is to reverse cancelling a policy and finding out you're uninsurable and can't get insurance at all or to find out that that policy was WAY cheaper or pays higher dividends or is better than current policies available today.

Michelle Said:

Is it possible to take out a loan on a life insurance policy?

We Answered:

That depends on the type of life insurance policy you have. If the life insurance is called Whole Life, Universal Life, Variable Life, Variable Universal Life, then you can borrow most of the cash value.

If it says "term", then there's nothing you can borrow since term insurance doesn't build cash value.

If you really think about it, isn't the cash value suppose to be yours in the first place? I mean, you pay your premiums and the premiums pays for the insurance and the savings. While you have access to your savings at anytime, the savings doesn't work like the bank. In order to access this savings in the life insurance policy, you have to borrow it at a 6-8% loan rate or cancel the policy and pay surrender charges. If you die someday, the insurance company keeps your savings, but at least they pay out the death benefit.

With term insurance, it doesn't build any savings. So you can save your money anywhere you want and take it out anytime without having to put it back. If you die during the term, your beneficiary gets the death benefit and family members will get your assets. If you die after the term, at least you will leave money behind for your family.

Betty Said:

Will a 1035 exchange with a life insurance policy that has a loan balance trigger a tax?

We Answered:

If the loan is rolled with the 1035, it will not trigger recognition of income. If the loan is smaller than your cost basis and is not rolled with the 1035, it will not trigger recognition of income.

You will only recognize income from the loan in a 1035 if the loan amount that you do not roll over is more than your cost basis (what you put in). If your insurance broker is any good, they should be able to talk with you about alternatives.

In more normal terms, if you don't move the loan over to the new policy, the old company let's you keep the money and is no longer a loan they expect to get paid back. What used to be a loan is now income, and your income is more than you paid in, you owe tax.

Marsha Said:

What is the Federal IncomeTax application to VA Insurance dividends and policy loan interest payments?

We Answered:

The dividends are not taxable income and the loan interest is not deductible. So no Federal tax reporting at all.