one of our clients took out small loans on their 2 whole life policies and did not pay them back. When they decided that they needed to change their policies to fit them better, both of the policies had accrued more interest than cash benefit and they had to cut a check to the insurance company to get out of them. People plan on paying the loans back but soon it becomes something on the back burner since they are not sent a bill every month.
I have only seen one clients situation with this, I am sure there is a more detailed answer.
Interest often runs in the 8% range on loans from cash value. If performance is below that, it could create a negative cash flow situation with the policy.
There is a term called "surrender squeeze" which is a major issue with using any kind of life insurance to fund retirement, etc.
It can happen where the policy has no value left and will implode. Client has the choice of making payments to keep it in force or surrendering with a possible taxable consequence.
For example, John Doe pays $30,000 in premiums into a policy. He borrows out 100,000 30 years later. Policy implodes and he has a $70,000 capital gain problem. No one wants to get that "better start paying your premiums again" letter at age 70.
Okay, so you been scared into thinking that loans from CV Policies equals devastation via prior post. Yet if you want to use CV Contracts as future cash for retirement or other purposes one should do some diligence and look for contracts that best meets ones objectives. You have several loan features that can be incorporated with many plans, "Wash Loans" are common and can be found, basically a 4% loan against a policy that guarantees 4% interest such as Guardians and other plans plus Dividends on top of the guarantee. With some UL's you have preferred loans, after the policy has matured usually ten years you get 2% or in some cases 0% with guarantees higher, making the funds free or nearly free to use. Plus keep in mind that the loan in a good contract doesn't effect the total amount of interest paid on the Cash Value. In other words if you have 100 grand built up and take out 30 grand of cash you pay interest on the 30 grand, yet you make interest on the 100 grand, basically the cash you borrowed is not directly taken out of your account nor does it mean that your Cash account is lowered in any way. You are borrowing money from the company not yourself, your money is only security. Just depends upon the loan features you have built into your contract or what the company offers. So basically like everything else, be a good shopper.
NML is a mutual company paying dividends on their policies. The loan value is always less than the surrender value and most carriers will allow you to borrow up to 90% or so of the loan value. The dividends can be taken in cash (rarely), used to reduce the premium, buy paid up adds, buy extended term.
If you borrow the max and never pay it back you can create a situation where the cash reserve is insufficient to pay the next years premium. If that happens the policy is surrendered and a check may be issued by the carrier for the net surrender value.
I have never encountered, or heard of, a policy accumulating so much debt as to require the policy holder to pay money to the carrier to terminate the policy. I suppose it could happen with a non-par policy, but I doubt it. The policy would most likely self implode before it ever got in a negative position.
I think someone has their facts wrong.
I would be curious if sman, chumps or others who had been in the life business for any length of time have ever know of a situation were a policy holder had to pay cash to surrender a policy.