Loan Rescue

1035 Exchanges and Mirrored Loans – When a client’s policy has loans, a 1035 exchange to a new policy may provide a needed death benefit at a lower cost. It may also offer clients living benefits to satisfy additional needs.

When a client’s policy has loans, a 1035 exchange to a new policy may provide a needed death benefit at a lower cost. It may also offer clients living benefits to satisfy additional needs. During a policy review, you come across an existing policy that a client purchased many years ago. It has accumulated significant cash value. However, you see that loans have been taken from the policy to pay for the premiums and/or to fund cash withdrawals. Those loans, combined with higher mortality costs and high loan interest charges, have subjected the policy to a potential unintended lapse. If this scenario fits the client’s current life insurance policy, the client has three courses of action to choose from:

THE CLIENT’S OPTIONS TO ADDRESS THE LOANS ARE:

• Do Nothing – The policy may lapse and taxes will be due if there is gain in the policy.
• Make Changes to the Existing Policy – Pay down or repay the loan using policy values or out-of-pocket funds. This may require a change to the annual outlay, a reduction to the policy death benefit, or both.
• Complete a 1035 Exchange to a New Policy and Mirror the Loan – When executed and designed properly, a 1035 exchange to a newer policy where the loan is mirrored may provide higher death benefit coverage and lower loan interest charges. The loan on the new policy can then be repaid out of pocket. Alternatively, in year two or later, the client can request a withdrawal, paying down the loan by using the policy’s available cash value. It is important to know that a withdrawal may incur surrender charges, may be subject to taxation, and the death benefit will be reduced. In addition, ongoing premium payments may be needed.

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