One of the benefits of cash value life insurance plans (eg Whole Life, Universal Life, etc) is the ability to "borrow against" it. That is, as the cash value (equity) increases, it's available as a loan, with the death benefit as the collateral.
This can be very handy when sudden, unexpected expenses rear their ugly heads. For example:
"Unable to secure a large enough bank loan, Walt Disney borrowed against the cash value from his life insurance policy to help finance the creation of his new theme park, Disneyland."
Other famous folks with similar stories include James "JC" Penney and Ray Kroc.
Of course, there's a balance here: while these loans can be quite helpful, they have the potential to be very dangerous, as well.
How's that, Henry?
Well, generally speaking, if one borrows from a policy and fails to pay it back, then the company merely subtracts the balance due from the death claim. No harm, no foul, no taxes. But what happens if one borrows from the policy, and it dies before the insured? That is, if it lapses while the insured is still alive?
Well, in that case, the borrower (and potentially his/her heir) are in for a nasty surprise: Form 1099-R.
Such was the case for a recently deceased client:
In January of '18, she let her Whole Life insurance policy lapse with a substantial loan balance. This January, she passed away. Yesterday, I got a call from her widower asking why he had received a tax form from Acme Life. I asked for the policy number to which it referred, and advised him that when the policy lapsed last year it created a taxable event, and that the balance due is being treated as taxable income (which would have also been the case if my client was still with us).
I always advise clients who take loans against their plans to at least keep up with the interest each year, to avoid the loan balance snowballing until the policy is unrecoverable.
Now you know.
This can be very handy when sudden, unexpected expenses rear their ugly heads. For example:
"Unable to secure a large enough bank loan, Walt Disney borrowed against the cash value from his life insurance policy to help finance the creation of his new theme park, Disneyland."
Other famous folks with similar stories include James "JC" Penney and Ray Kroc.
Of course, there's a balance here: while these loans can be quite helpful, they have the potential to be very dangerous, as well.
How's that, Henry?
Well, generally speaking, if one borrows from a policy and fails to pay it back, then the company merely subtracts the balance due from the death claim. No harm, no foul, no taxes. But what happens if one borrows from the policy, and it dies before the insured? That is, if it lapses while the insured is still alive?
Well, in that case, the borrower (and potentially his/her heir) are in for a nasty surprise: Form 1099-R.
Such was the case for a recently deceased client:
In January of '18, she let her Whole Life insurance policy lapse with a substantial loan balance. This January, she passed away. Yesterday, I got a call from her widower asking why he had received a tax form from Acme Life. I asked for the policy number to which it referred, and advised him that when the policy lapsed last year it created a taxable event, and that the balance due is being treated as taxable income (which would have also been the case if my client was still with us).
I always advise clients who take loans against their plans to at least keep up with the interest each year, to avoid the loan balance snowballing until the policy is unrecoverable.
Now you know.
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