Hello, I have a ACL policy from NWL. I understand that to access cash value, only the basis comes out tax free (because it went in taxed), but any earnings via dividends are taxable. So to access that money the best route is to take out a loan against the policy - with interest - and not pay it back. If the dividend rate is let's say 6% and the loan rate is 8%, doesn't this essentially wipe out the earnings?
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Explain Access to Cash Value
- Thread starter InsNovice
- Start date
Your correct which makes your best route option incorrect. Sometimes you may get lucky and the dividend at the time will cover your interest rate and your fine. Problem is that doesn't always happen, and if you don't pay your interest it is compounded, so your interest is charged interest if it goes unpaid. It has to be paid somehow whether from you or from cash in your policy.
It's a risk reward issue, if you are going to take a loan and never pay it (someone please correct me If i'm wrong on this it's been a little bit since I was an agent) your death benefit will shrink due to the interest if the interest is not paid.
So if you don't really need all your death benefit and want to take a loan and get the cash now and have less for your beneficiaries that's fine.
It's a risk reward issue, if you are going to take a loan and never pay it (someone please correct me If i'm wrong on this it's been a little bit since I was an agent) your death benefit will shrink due to the interest if the interest is not paid.
So if you don't really need all your death benefit and want to take a loan and get the cash now and have less for your beneficiaries that's fine.
- 4,132
It's going to depend on how you've structured your dividend elections. If your doing "paid up additions" as your election, your dividends and what they "earn" remain tax free. This is the snowball rolling down the hill effect and why whole life policies grow so much more later on in the life of the policy.
If you structure your dividends into an interest bearing account, then yes, those earnings are taxable. But you don't have to do it this way.
You can later surrender dividends without tax consequences. Some do this before loans. You have to look at the situation and pencil out things a couple ways.
You should pay back the loan. It may or may not wipe out the earnings inside the policy while the loan it outstanding, but whole life is not necessarily about rate of return. It's about access and use of your money when you need it unlike a 401k plan which ties it up until retirement.
dahonored1
Expert
- 86
correct me if I'm wrong, but I thought you can loan against your 401k as well, you just have to pay yourself back with interest..right?
- 11,327
Yes, you can borrow against your 401(k). A few caveats:
1) There's a minimum and a maximum. The maximum is 50% of your plan balance or $50,000... whichever is lower.
2) You can only have 1 kind of loan out at a time - 1 residential and 1 personal.
3) The remaining balance to earn returns is reduced by the amount of the loan (a BIG deal compared to life insurance which, if it's a non-direct recognition, is NOT reduced in respect to dividends).
4) You pay your loan back with after-tax money directly out of your paycheck. Which means that you'll be paying taxes again on that after-tax repayment when you pull it out in your retirement years.
5) Contributions to your 401(k) plan are suspended for 6 months. This is an IRS requirement.
6) If you leave your job, the entire balance is payable in full within 60 days... or you will owe taxes and 10% penalty on that balance.
So yeah, you can borrow against your 401(k)... but compared to a well-funded life policy... it really is no contest. The only real advantage for the 401(k), is a matching contribution from the employer... and that should be a MINIMUM of 50c per $1 being contributed. If it's less, that's not a match. That's an insult.
1) There's a minimum and a maximum. The maximum is 50% of your plan balance or $50,000... whichever is lower.
2) You can only have 1 kind of loan out at a time - 1 residential and 1 personal.
3) The remaining balance to earn returns is reduced by the amount of the loan (a BIG deal compared to life insurance which, if it's a non-direct recognition, is NOT reduced in respect to dividends).
4) You pay your loan back with after-tax money directly out of your paycheck. Which means that you'll be paying taxes again on that after-tax repayment when you pull it out in your retirement years.
5) Contributions to your 401(k) plan are suspended for 6 months. This is an IRS requirement.
6) If you leave your job, the entire balance is payable in full within 60 days... or you will owe taxes and 10% penalty on that balance.
So yeah, you can borrow against your 401(k)... but compared to a well-funded life policy... it really is no contest. The only real advantage for the 401(k), is a matching contribution from the employer... and that should be a MINIMUM of 50c per $1 being contributed. If it's less, that's not a match. That's an insult.
YourFamilyBank
Expert
- 46
You are semi correct, but don't take out basis first. Once you take via withdrawal then that money no longer earns interest. Even with NWL - if you take out via a loan, that same money earns 4% to offset some cost of the loan.
The way NWL treats loans though, you can't "bank" with it effectively.
Is NWL Direct Recognition or NDR?
- 477
You are incorrect on two points.
The type of loan you can take depends on the plan so you can have 2 personal loans. Also the 6 month suspension is not on loans but on hardship withdrawals.
- 11,327
I stand corrected.
Thank you.
Thank you.
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