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Question for the Money Doctors

Question submitted on Sep 18, 2013.

Question

I purchased a SPWL policy from MONY Ins. Co. back in 1987. I paid a one time premium of $30000. During the past 24 years I borrowed $56000. with the understanding I would not have to pay this money back. In 2011 for various reasons I let the policy lapse. Without knowing Mony sent IRS a 1099-9 showing a distribution of $123,000 roughly for 2011. The IRS is telling me I owe them $34000. for 2011. Mony has told me that the interest on the loan is taxable. Can this be accurate? How is loan interest considered a distribution.The original $30000. was guaranteed to get 8% interest.

Answer

Regretfully, you received a taxable benefit. You highlight a risk of borrowing from life insurance. Loans are not taxable as long as the insurance policy is in force. When you terminated the policy, a taxable event occurred.  The taxable impact is what you borrowed plus the interest above your loan less your original deposit. 

One should always consult a CPA on any change in a financial instrument before the change occurs. 


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