Al:
Right now the DB is 460K because of the loan. That is, if the loan was not repaid at time of death the DB would only be 460K.
So, if he died today, the death benefit would be 460K. She takes a 40K partial surrender, which reduces her CV to 60K-ish and her DB to 420. Then, she takes that CV that is cash in hand and repays the loan with it. Thus, the loan is repaid and the death benefit is now 460 because the loan has been repaid but the taking of the partial surrender still leaves the DB reduced.
I believe her taking the partial surrender will create a taxable event, however. The way the IRS sees it, if you take a partial surrender they consider you taking the portion that is interest first. Say she paid 100K for the policy, and had earned 30K in interest. If she withdrew 40 thousand, the IRS sees you as taking that 30K interest first, and THEN 10K of what you paid. Thus, 30K is what is taxable.
This must all be balanced against her father's life expectancy. The idea of not letting the policy loan set is to prevent it from gaining more interest and snowball into something larger. The amount that would have to be partially surrendered would have to be 40K NET of taxes. Thus, the DB could be reduced by 50 or 60K in theory to repay a 40K loan. Its a simple matter of calculating how quickly this loan will compound and how long he "should" live.
Right now the DB is 460K because of the loan. That is, if the loan was not repaid at time of death the DB would only be 460K.
So, if he died today, the death benefit would be 460K. She takes a 40K partial surrender, which reduces her CV to 60K-ish and her DB to 420. Then, she takes that CV that is cash in hand and repays the loan with it. Thus, the loan is repaid and the death benefit is now 460 because the loan has been repaid but the taking of the partial surrender still leaves the DB reduced.
I believe her taking the partial surrender will create a taxable event, however. The way the IRS sees it, if you take a partial surrender they consider you taking the portion that is interest first. Say she paid 100K for the policy, and had earned 30K in interest. If she withdrew 40 thousand, the IRS sees you as taking that 30K interest first, and THEN 10K of what you paid. Thus, 30K is what is taxable.
This must all be balanced against her father's life expectancy. The idea of not letting the policy loan set is to prevent it from gaining more interest and snowball into something larger. The amount that would have to be partially surrendered would have to be 40K NET of taxes. Thus, the DB could be reduced by 50 or 60K in theory to repay a 40K loan. Its a simple matter of calculating how quickly this loan will compound and how long he "should" live.