by farm5 » Thu Feb 19, 2009 06:35 pm
It is a whole life policy and we have made 3 payments. We want to borrow out to pay off a car/school loan with the bank. The loan is $20,000.00 and were told we would have to take out another policy to pay of the loan in full. We are having a hard time understanding why we can only borrow only $8,500 if we put in $21,000.
Posted: Thu Feb 19, 2009 10:54 pm Post Subject:
Without seeing the annual statement from the life insurance company there is no way to give an accurate intelligent answer.
That being said If I am understanding your post correctly you've paid $7,000 per year in premium over the past 3 years for a total premium outlay of $21,000.
You didn't state the death benefit of the policy or your husband's age or smoker/non-smoker status so I don't know if that premium relative to the face amount is good, bad, ugly or just about right.
Further, a life insurance policy isn't a bank savings account, the cost of providing the death benefit is subtracted from the premium you pay in.
Additionally, AND ESPECIALLY in the early years of a cash value policy there are surrender charges that apply.
That means there are two sets of numbers:
1) Is the actual account value,
the other is,
2) the cash surrender value,
you can only borrow up to the amount of the available cash surrender value.
This is a great topic!!!
If you could e-mail me your statement with all your personal indentifying information blacked out I'll post the statement on this thread so we can have an intelligent discussion based on the actual policy.
Posted: Fri Feb 20, 2009 06:21 am Post Subject:
you can only borrow up to the amount of the available cash surrender value.
That is what I think is the reason why she is allowed to borrow only $8k. OP, the policy has accumulated only that amount over these years as cash value. Therefore, you'd only get that much.
The cash value would grow with the time spend on the policy, the older the policy, more is the cash value.
The premium that you are paying isn't simply adding to your account. The cost of maintaining the coverage, administrative and other associated fees would get deducted from the amount paid. The rest would go towards building the cash value of the policy.
Hope it clarifies.
~Jeremy
Posted: Fri Feb 20, 2009 07:00 am Post Subject:
This is a great topic!!!
I agree!
First of all, you cannot view life insurance as an investment. Life insurance IS NOT AN INVESTMENT!!!! :!: :!:
It IS a method of providing a death benefit. While it can't be argued that there are plenty of life insurance policies that play in the investment arena, no matter what color you call it- it's not an investment.
While there are many contracts that accumulate cash value (CV), most people (usually due to inept agents) think that cash value equals loan value. It doesn't. Cash value rarely equals surrender value, either, unless the policy has been in force for awhile and there is no other indebtedness. Other things to remember is that the premium you pay doesn't equal the CV. There are all sorts of expenses (loads) that are sucked out of the premium and paid to the company leaving little money, especially in the early policy years, that actually goes into the CV account. So, if you send in, for example, a $250 premium, you might only see $75 actually be deposited in the account, and I have seen a lot worse that that. (Ugh...)
As well, as previously stated in this thread, we don't know what the face amount is nor how many years you're supposed to pay that annual premium. That would help us establish, to a point, your values.
Most companies establish loan values by taking the cash value and subtracting certain other values from that number to determine the loan value. This is a common method: CV - Premium owed to end of policy year - first year of interest - any existing loans and accrued interest - any existing early surrender charges = loan value.
Typically- this is an example of what it would look like:
Cash Value in account: $21,000
- premium to yr. end: (8,000)
- interest (est. 5%) ( 400)
- surr. chrg (est 12%) ( 2,520)
Loan Value: $10,800
Now, this isn't far off from the loan value you described, and my guess is just that- a wild guess based on what I've seen. I will be the first to admit that I have certainly not seen everything everywhere. There could easily be other additional charges that I have no idea may exist, and you need to seriously review your policy documents to see what's up.
Gary- Do you have any policy specimens or the like sitting around that you could find some terms on policy loans?
A couple of other things. People need to remember that life insurance cash values are not intended for use as a savings account that can be accessed upon whim. While it's true that the policyowner does own the rights to the cash value in most cases, this should in no way, shape or form be viewed as similar to any investment account that exists. The IRS has a set of completely different rules for life insurance, and you could run into some taxable events as well if things go seriously awry in a loan. So please be careful as to how you use this policy, and remember- it's supposed to be there to help in the event of death. That's the reason, and only reason, you should have purchased it.
InsTeacher 8)
Posted: Fri Feb 20, 2009 03:30 pm Post Subject:
Taking massive loans against a policy is bad news....you'll probably dig a hole that will be tough to get out of. We have a client right now with a six-figure policy loan that is getting charged close to five figures in interest every year. Now we're trying to work on a rescue plan, but it's almost impossible to do without a massive out of pocket expense. You would be much better off with a universal life policy that will cost you $2.5-3.5k/year so you can use the remaining $4-5k/year to pay for the car/school loans you are talking about. The UL policy will still get you a guaranteed death benefit, it just won't have the cash value of the WL program.
Posted: Sun Feb 22, 2009 04:46 am Post Subject:
You don't provide enough detail about the policy type but It sounds like if you take all the cash out it's probably not worth keeping. Look for less expensive coverage for the appropriate death benefit. I also like UL's with lifetime guarantee's. Much less expensive than WL.
Posted: Sun Feb 22, 2009 02:52 pm Post Subject:
Taking massive loans against a policy is bad news
I certainly agree with this point.i will just explain how it is true.
Suppose your cash value is $ 21,000.
You want to take a loan $10,000 ( you can get that much only)
Now you want a loan it will be charged some interest say 7-8 %
$ 700-800 only in interest.
See the magic...
1. money is yours
2.Instead of you getting interest on your money, you are taxed for administrative charges and bla. bla. bla.
3.You pay interest on your own money when you are in trouble
It is not at all advisable to go for loan from any insurance company with this amortization process. :wink:
Posted: Sun Feb 22, 2009 11:27 pm Post Subject:
I was told that the reason for a surrender charge was to avoid money laundering. In the past individuals would start a life insurance policy and give a check of a certain amount of money. Lets say it was 25,000 dollars. They would pay for the policy with this amount and when they went throught the Paramed exam and passed they would cancel the policy. They used dirty money to buy the policy and then get a clean check from the life insurance company. The surrender charges are used to make sure that money is not taken all out right away.
Michael
Posted: Mon Feb 23, 2009 05:32 am Post Subject:
Wow! that's an interesting piece of info, Micheal,turning the dirty money to legal. However, I think can one can still cancel the policy and get the permium paid back within the free look our period. So, they can still play the dirty little game and transform their illegal money into legal currency without much trouble. Isn't that correct?
Posted: Mon Feb 23, 2009 02:07 pm Post Subject:
I am not an expert in this field so I am not sure. I think that they have other things in place now to prevent that sort of thing.
Posted: Fri Feb 27, 2009 02:37 am Post Subject:
Dgoldenz... remember we had this discussion on another forum where I explained that many people look at insurance as a savings acct. I believe this post made my point...
Anyway, no one can properly answer this question without seeing the policy. Yes, cash value is different than what one has paid in but no one here should be offering in depth advice without having seen the policy.
As per usual, Gary is dead on in his reply.
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