Policy Loan Rescue

Policy Analysis and Review (PAR) is a fundamental process of our training. Without question reps in the insurance industry should be reviewing their clients policies on a regular basis. This also includes reviewing the policies that you did not sell them. In most cases you will be able to provide three possible outcomes:

  1. They will be able to get a new policy with the same benefit for less money.
  2. They will be able to get a new policy with the same premium but more benefits and guarantees.
  3. You will let them know they have the right policy and should stay right where they are.

But what happens when you run into a policy that has a big loan attached to it? Most of the reps we deal with see this as a no-win scenario. But that does not have to be true. There are several carriers that will take a 1035 exchange that includes an existing loan. Here is an example of how that would work.

How to Rescue a Client from a Policy Loan

CASE STUDY
Situation
Paul has an outstanding loan of $126,048 with a 6% loan interest rate on his whole life policy. He’d like to stop paying premiums, but Jeff and his advisor are concerned when they review the in force illustration. If Jeff decides not to pay any future premiums, loan repayments, or loan interest, the cash value and death benefit are reduced at a rapid pace. Even worse, the policy is projected to lapse at age 85 leaving Jeff with no cash value, insurance, and a tax bill for the gain.
Facts
  • Paul Massey, Age 54, Standard No Tobacco
  • $500,000 death benefit on existing policy
  • Net Cash Value = $187,149
  • Loan = $126,048
  • Cost Basis = $195,539
  • Gain if surrendered = $74,951
Solution
Paul does a 1035 and transfers the existing policy’s cash value and loan to a new insurance company. In year 2, he takes a withdrawal to repay the loan balance and completely pays off the loan. Without paying any additional premiums, Jeff is left with a death benefit of $500,000 that is projected to last to age 101. This is possible for two reasons:

  1. Newer policies have better guarantees and lower mortality costs. This allows a newer policy to be cost-effective and provide a longer guarantee than the existing policy
  2. The new policy allowed the 1035 exchange with the loan attached. Once the cash was moved over to the new policy it was a simple matter to repay the loan internally with the existing cash value.

Policy Analysis and Review (PAR) is a great tool for our advisors. Now we have a solution to rescue those policies that have loans on them. Give us a call and we can help you.

About Jeffrey Berson

40 years in and around the industry has made Insurance a part of my DNA. I have had the pleasure of working with and for some of the greatest minds in our industry. My "Bersonal" View is an attempt to capture some of the best ideas, the best concepts and the best practices in a way that can lead to success for others. It will certainly be my point of view, so please...don't take it "Bersonal".
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