Taking out a loan from whole life insurance policy

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PostPosted: Mon Mar 25, 2013 7:15 am   Post subject: Taking out a loan from whole life insurance policy  

I’ve a whole life insurance policy. I know that I can take out a loan from there. But if I do so and die before paying off the same, what consequences would it bring? Wouldn’t the beneficiary get the full death benefit?


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RobertChristopher
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PostPosted: Mon Mar 25, 2013 7:22 am   Post subject:   

The death benefits that the beneficiary would receive are reduced depending on the loan amount and the total outstanding.



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PostPosted: Mon Mar 25, 2013 10:39 am   Post subject:   

Quote:
Wouldn’t the beneficiary get the full death benefit?
Life insurance policy loans are not "free money". Your cash value serves as collateral for the loan principal and unpaid loan interest as it accrues. The cash surrender value in a "plain vanilla" whole life policy (not UL of any kind) is part of -- not in addition to -- the death benefit. The "net amount at risk" is the insurance company money that will be added to the cash value to pay the full death benefit if the insured dies. (Almost all WL/Cash Value policies include "surrender charges" -- an amount of money the insurance company would deduct if the policy were terminated voluntarily by the policyowner, or as the result of nonpayment of the premium when due. The surrender charge is deducted from the cash accumulation and the balance, if any, would be paid to the policyowner. Surrender charges cannot create a "negative" balance.)



Any death benefit payable, however, is reduced by the amount of the lien against it created by the policy loan. The policy loan will accrue interest (either in advance or in arrears) and will be added to the loan balance if not repaid before the next interest calculation on the unpaid principal. Once capitalized into the loan balance, it, too, will bear interest until repaid. At the death of the insured, the insurance company will first use the policy proceeds to extinguish the debt -- all unpaid interest and principal (and capitalized interest) is deducted from the death benefit and the balance is paid to the beneficiary.



The various forms of Universal Life insurance offer "Option 2" (or "Option B" or "Increasing Death Benefit"), which adds the cash accumulation to the death benefit amount. The loan and unpaid interest cannot exceed the cash accumulation amount (less any current surrender charge) or the policy will lapse. But until then, an Option 2 UL/IUL/VUL policy will pay the full death benefit plus any unencumbered cash accumulation amount remaining. The loan still creates a lien against the cash accumulation, but in Option 2, the cash accumulation is not part of the "net amount at risk", which always remains the full face amount of insurance.



The hazard of policy loans is that the accruing unpaid interest can increase the loan amount beyond the cash surrender value. The insurance company will notify you 30-60 days prior to any lapse (the policy is in its "grace period") to give you time to at least pay some or all of the unpaid interest and/or principal to keep the policy in force. If unpaid at the end of the grace period, the policy will lapse without value -- all the cash value will be used to erase the debt, and if more than the premiums paid, will result in a taxable event (with no money available to pay the income tax due).



Too many people misunderstand this, and believe that borrowing from their policy is free (and tax-free under all circumstances, which it is not). Some of them end up with no life insurance before they die.


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PostPosted: Tue Mar 26, 2013 5:16 am   Post subject:   

Yes Of course beneficiary will get full death benefit of life insurance policies can provide quick and welcome income for surviving family members after a death. The beneficiary will probably want to get the claim process started as soon as possible.



But You'll want to find out the answers to the following questions:



    What type of life insurance policies -- term, whole life, or variable life -- did the deceased have?



    Was there any credit insurance (to pay off credit card balances or, sometimes, amounts owing on major purchases such as furniture) or mortgage insurance (to pay off a mortgage)?



    Were the policies still in force at the time of death?



    Who are the beneficiaries?



    How much will the company pay?



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PostPosted: Tue Mar 26, 2013 3:19 pm   Post subject:   

Quote:
Yes Of course beneficiary will get full death benefit of life insurance policies
This statement is 100% false if there is any amount of outstanding policy loan and/or interest. Richard Davis apparently is a "Water Damage Adjuster" (aka: public adjuster) and not a life insurance agent. Stick to property and casualty claims adjusting . . . you might be better at that than you are giving life insurance claims advise.



He goes on to state: But You'll want to find out the answers to the following questions: and none of his questions have anything to do with the OP's question, and none of them have anything to do with loans from cash value life insurance policies. Other than the question about the policy being in force, his post is a wasted effort.



The type of life insurance is meaningless. The only thing that matters is whether the policy was in force at the time of the insured's death. Any policy debt reduces the amount of benefit the beneficiary will receive, and it doesn't matter who the beneficiary is.



Credit insurance purchased to pay off credit card balances . . . that money goes only to the lender, so there is no point in discussing that -- no one of importance will see a penny of that money. And a disreputable lender could continue to send bills as if the balance had not been cancelled, hoping that someone or the estate pays a second time.


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PostPosted: Mon Apr 01, 2013 1:08 am   Post subject:   

Quote:
Almost all WL/Cash Value policies include "surrender charges" -- an amount of money the insurance company would deduct if the policy were terminated voluntarily by the policyowner, or as the result of nonpayment of the premium when due.




Are you sure that you have ever sold life insurance? Most UL policies have surrender charges that last for a number of years. Most WL policies don't have surrender charges. The cash value is exactly what a person will get if they surrender a WL policy.

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PostPosted: Mon Apr 01, 2013 4:12 am   Post subject:   

Quote:
Most WL policies don't have surrender charges. The cash value is exactly what a person will get if they surrender a WL policy.


Again, you argue semantics. Yes, of course there is no "stated" surrender charge, but that's because there is no transparency in WL policies. The cash value is the "Cash Surrender Value" which implies that there is a penalty being imposed. How much is it? How long does it last? No one outside the insurance company can tell you precisely, but it's built into the stated cash value. If it weren't, the premiums paid would not result in $0 cash accumulation in policy years one and two, and there would not be a need for a standard nonforfeiture law that requires a WL (and other cash value policies) to begin accumulating cash value by the end of the third policy year.



Paying, let's say, $100 per month in premiums, would result in more than $50 or $100 in cash value at the end of year 3 if there weren't a surrender penalty being imposed somewhere. Especially when the policy is supposed to be returning that 4.5% or greater rate of return.



Argument for the sake of slinging mud gets you nowhere.



If you've ever done a genuine analysis of a WL policy, as I do, you would be able to roughly identify the point at which the surrender charge has disappeared because the cash value finally begins to accelerate along that 5% trendline, and then compounding takes hold and accelerates the accumulation even more on the path to endowment.


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PostPosted: Mon Apr 01, 2013 2:06 pm   Post subject:   

There is no stated "surrender charge" because there is no surrender charge. It's called a cash surrender value because that is exactly what it is. At some point, does it stop being called a cash surrender value? Nope. According to your logic, that would mean that surrender charges last forever.



A surrender charge means that someone gets less than the stated value.



Getting exactly what is promised strikes me as complete transparency.



Why is the policy supposed to get a 4.5% or greater rate of return? It is only Max Herr who claims this.


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PostPosted: Thu Apr 04, 2013 4:50 am   Post subject:   

I don't feel it's a good idea, but yes the beneficiary does get the full benefit.

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PostPosted: Thu Apr 04, 2013 2:00 pm   Post subject:   

Quote:
but yes the beneficiary does get the full benefit.
But no, the beneficiary gets the death benefit minus the loan amount and unpaid interest on the loan.


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PostPosted: Fri Apr 05, 2013 3:03 am   Post subject:   

Thanks Max for putting it so simple..Smile


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PostPosted: Sun Apr 14, 2013 5:20 am   Post subject:   

The answer, just so we're clear is: death benefit will be reduced by the outstanding loan amount.





Quote:
If it weren't, the premiums paid would not result in $0 cash accumulation in policy years one and two, and there would not be a need for a standard nonforfeiture law that requires a WL (and other cash value policies) to begin accumulating cash value by the end of the third policy year.




Actually that's not 100% true. A whole life policy making use of a modified reserve design would explain a zero cash surrender value in year 1, and that would not require an implied surrender charge.



And regarding SNFL, that was actually adopted law to force the sharing of profitability (the asset share) and has nothing to do with surrender charges, which are technically used to amortize expenses. So the suggestion that SNFL reduces surrender charges is fundamentally incorrect.


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PostPosted: Wed Apr 17, 2013 10:52 am   Post subject:   

I don't think it to be a feasible option, but the beneficiary in this case may get the full benefit...

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