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drawing money from life insurance
Old 08-20-2015, 11:30 AM   #1
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drawing money from life insurance

my sister in law needs back surgery and my brother in law was wondering if he took money from his life insurance policy is it taxable or is it better to borrow against it? he wants to withdraw some but do it in a way that has the least tax consequences. thanks
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Old 08-20-2015, 04:30 PM   #2
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If he cashed it in, typically any amount received in excess of premiums paid would be income for tax purposes. He can ask the insurer what the tax implications would be if he surrendered and they should be able to provide that to him.

If he is no longer insurable, he may be better off to take a loan unless he has no need for life insurance.
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Old 08-20-2015, 04:51 PM   #3
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Aren't policy loans tax free?
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Old 08-20-2015, 07:11 PM   #4
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Quote:
Originally Posted by Big_Hitter View Post
Aren't policy loans tax free?
It's been a long time since I took a policy loan, but I do not recall a requirement to even report the transaction on the tax form. If you sell (relinquish) the policy, you may indeed have to pay taxes. My suggestion (just a suggestion) would be to decide if the policy is still needed. If so, keep it and find funds elsewhere. If not, get rid of it and use the proceeds for required expenditures. YMMV
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Old 08-20-2015, 07:47 PM   #5
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Yes, policy loans are tax free. I said.... if he cashed it in.

The downsides are that you can't generate as much cash (usually the max policy loan is the CSV * (1- policy loan interest rate)), but more importantly, you still need to keep paying the contractual premiums.
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Old 08-21-2015, 05:00 AM   #6
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thanks guys. I got the answer I was looking for.
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Old 08-21-2015, 08:15 AM   #7
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Just keep in mind that if he still needs the insurance benefit and could no longer pass underwriting that he should keep the policy and take a loan.

As an aside, I still keep mine even though I no longer needs the insurance because I have had it long enough that the CSV pays 4% annual interest with no interest rate risk and little credit risk so it is attractive as a fixed income investment ignoring the life insurance benefit.
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Old 08-29-2015, 07:45 PM   #8
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What is the rest of his financial situation, as perhaps he would be better off paying for the surgery with credit cards and then if his debts are too large to his income, declare bankruptcy.

After all if he had a lot of savings and stuff, he wouldn't be thinking of selling his life ins.
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Old 08-30-2015, 07:06 AM   #9
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not good. one is on social security and the other works, but not a lot of savings. the worst part is that the brother in law just got out of the hospital a month ago after having surgery for a gall bladder obstruction and some other stomach problems. when it rains it pours.
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