Whole Life surrender

[Nice Guy Eddie 13730]

I have an elderly relative who made the mistake of buying whole life insurance and he took out a loan against it. I gather there are ways to surrender the policy to just walk away. Is there any rule of thumb on when someone should do this? I guess if someone is old enough maybe it's worth keeping?

And before you say anything, I 100% agree that whole life insurance is shit and their sellers are payday loan scam artists. I also find it sad when someone has a life insurance policy for the sole reason to leave a small amount of money to someone. It burns me up when I see Metife on TV hawking this crap, especially to minorities.

 

[NeverMarryAStripper 22297]

If you surrender it and walk away the loan amount and accrued interest could become taxable income

[Guest Lobo]

^
Yep, it's like walking away from a big credit card bill for half the amount.  It's unearned income, in a way, above what premiums were paid in/accrued.

This loan against insurance, against qualified retirement/ERISA plans, and reverse mortgages are about to absolutely explode beyond anything anyone can fathom.

These scams are gonna make those student loan forgiveness schemes look honorable by comparison.  

Edited May 3, 2020 by Lobo

[TwiceHorn 32079]

Isn't the best plan to die with the loan outstanding, then the death benefit covers it?

I think the best "policy," as you note, is to avoid whole life, but if you're in it, elderly, and have a loan, then it's probably best to just ride it.  Maybe even max the loan outstanding while you're at it.

@Reagan1k is the practical answer man on stuff like this, I believe.

[NeverMarryAStripper 22297]

Yes, the best way out of a whole life policy with a loan against it is to just die. It’s kind of like a marriage

[Reagan1k 3042]

@TwiceHorn & @Nice Guy Eddie    I wouldn't hold out as an expert and to be sure I don't have a dog in this fight one way or the other.  I'm not in the industry nor am I a stakeholder, but I do have a lot of experience with insurance and its use in planning.

My only statement regarding cash value insurance (whole, variable, universal, permanent - whatever you want to call it) is that it is a tool.  A hammer is as worthless as tits on a boar when you need a miter saw, but in the right situation, there can be a place for the tool.  The harm comes in when the product or tool is sold where there is no need for the use, nor is it the right tool for the problem.

Now - to the question at hand.....to make the best decision, one needs to get some information.

1) What is the annual premium, balance of the loan, the interest rate, remaining net cash value, and net death benefit?

2) Is there a dividend being paid and if so, how is the dividend now being used and can the dividend be used to pay the interest in part or in full?

3) What is the owner's cost basis in the policy - amount of total premiums paid (not interest)?

Taxes upon surrender are only due if the amount of the loan surrendered and any remaining cash value surrendered (paid out above the loan) exceed the premiums paid.  If there is no "gain" then there are no taxes.  Often times, considerable angst is generated over no or very few tax dollars - especially when talking about a small policy.  

If there would be a taxable gain (loan balance plus cash value surrendered exceeds premium, then there are a number of options.  1) Pay the taxes and walk away 2) Pay interest annually to freeze the loan 3) Apply the dividend to the interest and then the loan principal to freeze and or reduce the loan 3) Reduce the death benefit by restructuring the policy and wiping out the loan- Those would be the most common.

The real answer depends on the policy, the insured / owner's financial condition, and the goals.  Is the death benefit needed?  Is there cash somewhere else that can be used? Is there someone else who can take over the policy?

There is often a lot of emotion involved when one talks about life insurance and that clouds the discussion.

What is needed now is an In-Force Ledger  from the insurance company- showing the policy status and what will happen to the policy if status quo holds.  From there you can see the clear picture and either make some decisions or seek advice.

Edited May 4, 2020 by Reagan1k