Question for the Money Doctors
Question submitted on Jan 2, 2014.
QuestionI have a whole live insurance(I''m 74)policy with state farm for 60,000. the annual premium is 2142.40.The dividends were used to pay the unpaid premium. The previous loan total was 95,314.62 plus loan interest due of 5,718.88, making a new loan balance of 101,033.50. My dividends are left with the company to accumulate at interest, and my total dividend accumulation is 20,442.85. My paid up dividends additions are 106,882.95. My cash value is 117,825.91 which increased 2,204.42 last year. The cash value total includes 84,362.71 which is the cash value of my paid-up dividend additions. I''m at a total loss about what all this means, but it looks like I need to die soon or go broke on the policy. Unfortunately I have several policies much like this one. Any way to get out of this trap? I don''t have nearly enough money to pay off the loan.
Thou shalt not borrow substantial amounts over a long term period of time from our life insurance. Although I would like to say otherwise, this is a significant and serious problem and needs to be dealt with properly.
When a policy lapses in this condition, significant loans outstanding, it triggers significant taxable income for which the insurance company will issue a document to alert the IRS that you have taxable income.
I suggest the following.
1. Contact your insurance agent and have the agent run in force ledgers to see how long the insurance policies last and what it would take to keep them in force.
2. Contact a CPA to determine what your tax consequences are if the policies should lapse (it will be significant).
3. Assess your total net worth. If you are insolvent, you may have a section 108 opportunity (your tax advisor should explain this to you)
4. Depending on where your assets are, you may also need to contact a tax attorney.
This is a very serious situation and you should take some or all of the steps outlined above.
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