loan against life insurance

**CeeBee** · 06-08-2010, 06:01 PM

My husband has a whole life policy that his parents took out for him when he was a baby.

Long before we were married, he borrowed 4K against the policy and hasn't paid back a cent in the meantime; he did not know that the interest would accumulate and cause the policy to automatically terminate.

About a month ago, I started working on paying it back, because I'm nosy like that.

Is this a wise thing to do? He has 400,000 worth of life insurance through the military, and our only other debts are a mortgage and a car payment.

I know Ramsey says whole life is a rip off, but I don't want to pay the tax man when the policy terminates.

**mek42** · 06-09-2010, 01:05 AM

How much would it cost and how soon to keep something you don't want anyway? How much are the taxes going to be (what is the disposal cost)?

If the same dollar amounts were for making payments on a boat you never used vs. losing a little by selling it, what would you do?

**Greebo** · 06-09-2010, 09:54 AM

Tax on what - if hubby owes that much on the policy, he won't be getting any money back to be taxed on.

Kill it.

**CeeBee** · 06-09-2010, 09:56 AM

oh, lord, it'll cost about 8K to pay it back, and no we don't really need it. If we cashed it out, that'd be about 10K worth of taxable income. I'm not sure how much of a bite that would be.

If this were a boat or a vacation house, it would seem like a no-brainer to me... good point.

Husband wants to keep it, mostly as a savings vehicle.

But maybe it's worth talking to him about it. He's already pretty well insured. I'm not insured at all.

Might be worthwhile to cash it out and take out some term insurance on me instead.

**CeeBee** · 06-09-2010, 09:58 AM

My understanding is that the whole cash value of it is taxable, not just the 2K that's not yet been eaten by the old loan.

**Greebo** · 06-09-2010, 10:08 AM

Originally Posted by CeeBee

oh, lord, it'll cost about 8K to pay it back, and no we don't really need it. If we cashed it out, that'd be about 10K worth of taxable income. I'm not sure how much of a bite that would be.

Oh, yeah ok that makes sense.

So you owe 8k and it has a 10k value so the net would be 2k?

So kill the policy, bank the 2k and use it to pay the taxes, and then you don't have to pay premiums anymore.

But make sure you have adequate TERM life ins. in place before hand.

**CeeBee** · 06-09-2010, 10:29 AM

makes sense. That's a plan I can present. The 55 bucks a month for premiums could surely be better spent elsewhere. Like going toward our van payment.

Thanks!

**mek42** · 06-09-2010, 10:35 AM

Did he pay the premiums with before tax or after tax dollars? I haven't taken Tax yet nor am I a whole life expert, but it seems to me if the premiums were paid for with after tax dollars then only accrued interest should be taxable.

Even if the whole amount is taxable, I would figure out what the tax bill will be and if setting budgeting whatever the premium should be would cover the tax bill, just do that and take the $2k and put it in an investment vehicle of your choice. That way you can satisfy the savings desire too.

Good luck!

**frugalfriend** · 06-09-2010, 11:24 AM

Get rid of this policy the quicker the better and get term life insurance on dh that is 8 to 10 times his income. A term policy for you would be good too.

**brainyblonde** · 06-09-2010, 07:51 PM

If the surrender value of the policy (including the loan already taken) exceeds the premiums paid, the difference (gain) is taxable as ordinary income.

**a.nonymous** · 06-10-2010, 05:34 AM

Originally Posted by CeeBee

Husband wants to keep it, mostly as a savings vehicle.

That's a bad idea in almost any case. Whole life insurances are terrible savings/investment vehicles.

**Greebo** · 06-10-2010, 08:51 AM

Originally Posted by a.nonymous

That's a bad idea in almost any case. Whole life insurances are terrible savings/investment vehicles.

Very true.

**CeeBee** · 06-13-2010, 08:48 PM

I'm sure that is is true, Greebo.

Honestly, I can't say whether all those years of paid premiums are more than the cash value. Hmm. Something to ponder.

what a mess. This is why I've always liked to keep my finances simple enough for a sixth-grader to follow. lol. I am not smart enough to handle complicated money.

Started shopping around for some term policies-- hopefully I can find one that is reasonably priced for a 41 year old with the regular ailments of middle age.