In a recent blog discussion, we mentioned the danger that old policies assumed to be “permanent” are on course to “lapse” (i.e., terminate) before the deaths of those they insure. Wasted premiums are not the only disastrous consequence. For policies with loans, usually because premium payments stopped, the borrowed cash value and unpaid interest that exceeds premiums paid is all taxable income – and at ordinary income tax rates. With loans well over a million dollars, such as with two of our recent clients, this poses a real dilemma.
If there is a danger that a policy with a loan will implode before the insured dies, steps need to be taken to avoid or at least minimize that risk. Agents often assume a willingness on the part of clients to pay off these loans. Even when loans ballooned, they did not suggest ways to reduce them or at least to prevent them from growing.
This common problem is only the most compelling reason for a periodic review of existing policies. Do you know how your policies are doing or, if you are a professional advisor, those of your clients? It may be time to find out.