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Question for the Money Doctors

Question submitted on May 31, 2012.


my mother recently died and my 82 yr old father has a second to die policy, that he would like to borrow against.


Most life insurance policies allow an owner to borrow against the cash surrender value.  However, there are several issues for you to consider.  Many times a second to die policy has been purchased to fund estate taxes and is actually owned by an irrevocable life insurance trust.  If that's the case, then the trustee would have to take the loan and it would have to be permitted by the trust and/or applicable state law.  Also, in many instances the type of policy used to fund estate taxes is one that builds up relatively little cash surrender value (as the expectation is that the policy is being used primarily for its death benefit), so the amount of the loan may be limited.  Finally, if your father does take a loan against the policy he will have to make sure that the policy does not lapse in the future.  If the policy ever lapses, the amount of the outstanding loan will be treated as a cash payment to him and he will likely owe income tax on some of that.  Many people have found that the reduction in estate taxes has left them owning insurance which they no longer need nor wish to fund.  For some of these people, it makes sense to consider taking advantage of rules which would allow the tax-free conversion of a life insurance policy into an annuity.  This can sometimes have the effect of turning an unwanted expense (i.e., the life insurance premiums) into a source of retirement income (i.e., distributions from the annuity).  

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