Loan protection WL vs IUL

[DHK]

BS. Its important enough that they state it in both the illustration and the contract.

If the IRS has not ruled on it... its a grey area that certainly has the potential to change based on an IRS or Court ruling. They would not say that in the contract if it wasnt.

In THEORY it should abide by IRS regulations. But the IRS has shot down a ton of THEORIES in court over the years.

And if it was such a sure thing, why would a multi-billion dollar insurer not spend a few thousand to get an IRS LoD on the subject?? The answer is obvious... they dont want to risk a denial.

And the control is not in the hands of the insurance carrier. They do not determine tax law or how new features are considered by the IRS. Only the IRS and the Courts are in control of that.

This is a product feature that has only existed for maybe 20 years max, until it has an IRS LoD, or a Court Ruling; there is no guarantee it will be considered compliant in the future. And insurers get IRS LoDs all the time for new product features that are tax related.... so it begs the question why none have so far for this one particular product feature....

Oh, I understand. But if the insurance company puts in specifics on how to do this within the existing contract law, an IRS determination letter is not needed.

Maybe OneAmerica works differently, but here's the literature and conditions. (They call it Loan Interest Rate Limitation Rider). Note: this rider is ONLY available on limited-pay WL policies.

***

What are LILRs conditions?
You will be notified when the following five conditions are met in order for the rider to be
activated by you:
• Policy must be paid-up
• Insured is age 75 or more
• Policy must be at least 15 years old
• Policy is not a modified endowment contract
• Loan value is 95% of the total cash value

Once LILR is exercised, no access to cash value will be available, but the policy will stay in force and eventually pay a reduced death benefit to your heirs.

***

No disclosure about IRS understanding required, etc. The insurance company controls the levers and how to avoid lapsing the policy according to their own conditions.

 

[DHK]

And every OPR that I've seen has similar conditions that must be met whether it's WL or IUL.

 

[scagnt83]

Oh, I understand. But if the insurance company puts in specifics on how to do this within the existing contract law, an IRS determination letter is not needed.

Maybe OneAmerica works differently, but here's the literature and conditions. (They call it Loan Interest Rate Limitation Rider). Note: this rider is ONLY available on limited-pay WL policies.

***

What are LILRs conditions?
You will be notified when the following five conditions are met in order for the rider to be
activated by you:
• Policy must be paid-up
• Insured is age 75 or more
• Policy must be at least 15 years old
• Policy is not a modified endowment contract
• Loan value is 95% of the total cash value

Once LILR is exercised, no access to cash value will be available, but the policy will stay in force and eventually pay a reduced death benefit to your heirs.

***

No disclosure about IRS understanding required, etc. The insurance company controls the levers and how to avoid lapsing the policy according to their own conditions.

Whats written in the contract is immaterial to what the IRS determines if they decide to investigate the issue. I can write a contract that says the money is totally tax free no matter what... doesnt mean the IRS will agree.

This is exactly the type of thing carriers get an IRS LoD for. It is 1000x cheaper to get an LoD than to fight an IRS ruling in court. But none have.

---

Every OPR has certain provisions the policy has to meet. But it is the carriers own determination what that is. There is no existing regulatory structure those guidelines are following. It is an actuarial decision.
---

But what you provided is not part of the illustration or the policy contract. I would be extremely surprised if OneAmerica did not include it in at least the actual contract like many other carriers do.

 

[scagnt83]

No disclosure about IRS understanding required, etc. The insurance company controls the levers and how to avoid lapsing the policy according to their own conditions.

My point is the IRS determines what a "Policy Lapse" is for tax purposes. Not the carrier. If a "No Lapse" feature is triggered, the IRS could easily determine a Lapse has occurred for tax purposes.. if they chose to do so.

When a provision of a financial contract violates the "spirit" of the law, the IRS has a history of stepping in and making it a true violation. This happens all the time in ERISA Law & Regs. And is exactly why many carriers put the disclaimer about it.

 

[scagnt83]

Here is AIGs wording:
"The tax consequences of the Overloan Protection Rider have not been determined by the IRS or the courts, and it is possible that the IRS could assert that the outstanding loan balance should be treated as a taxable distribution when the Overloan Protection Rider is exercised. For advice concerning your individual circumstances, consult an attorney, tax advisor or accountant"


Here is Penns:
"Neither the IRS nor the courts have ruled on the tax consequences of exercising the Overloan Protection Benefit Rider. It is possible that the IRS or a court could assert that the policy has been effectively terminated and that the outstanding loan balance should be treated as a distribution, all or a portion of which could be taxable when the rider is exercised. In addition, this Overloan Protection Benefit Rider may not be appropriate for your particular circumstances. Consult with a tax professional regarding the risks associated with exercising this rider."


These disclaimers are in both the illustration and the actual policy contract.

 

[scagnt83]

Note that Prudential, Symetra, Nationwide, & Equitible include this disclaimer in their illustration.


Equitible includes this tidibit as well further down in the illustration:
"Tax rules pertaining to life insurance can change at any time and can affect existing life insurance policies. "

 

[DHK]

So you're saying that the act of exercising the rider... is the same as if the policy lapsed? Even though the contract is still in-force and valid?

I don't see how an in-force contract = a lapse. Looks cut and dry to me.

If the economics of the contract affords the policy to stay in force, the government should (I know 'should' is the word here) not have any say in how the insurance company affords to keep it on the books... to also pay a residual death benefit later that the insurance company is legally obligated to pay (generally speaking).

ERISA is government regulations regarding Qualified retirement accounts. Accounts don't have the same protections as contracts do. Contracts will require a 2/3 vote of Congress to enact anything. ERISA accounts... don't. And ERISA, I believe, doesn't have the lobbying power that the insurance industry does.

Even if they do create a new law on these contracts, past precedent allows for grandfathering.

 

[DHK]

And Democrats love life insurance more than the GOP does. If Chuck Schumer has ANY redeeming qualities... it's that.

 

[DHK]

It appears that OneAmerica is more confident in their rider. Here are the sample pages in their policy:

 

[DHK]

And to remove a provision that benefits the consumer so much? Hell, I bet Elizabeth Warren would fight to keep that provision to protect policyholders.