MEC Loans

[Lloyds of Lubbock]

Then the loan would not be a taxable event.
If there is no gain on the policy there is nothing for the insurance company to report.,
Whole we try to avoid a MEC, in some circumstances it may suit the client.
MEC is a 3 letter word...not a 4 letter word.

 

[scagnt83]

What if there is a small gain? Going back to the original question, is the gain still taxable if the loan is paid back the same year?

Regarding Allen's comment, do Loan Repayments count as Basis? Im guessing because you have already paid taxes on that amount?

 

[Allen Trent]

Then the loan would not be a taxable event.
If there is no gain on the policy there is nothing for the insurance company to report.,
Whole we try to avoid a MEC, in some circumstances it may suit the client.
MEC is a 3 letter word...not a 4 letter word.

I believe it is still a taxable event in that the reporting & calculation to adjust the cost basis will occur. Similiar to how a Variable Annuity with a loss will still issue a 1099 R showing the amount of the distribution, but 0 taxable. Maybe some carriers dont issue a 1099, but I believe they are supposed to update the tax calculation of the policy regardless of whether there is $0 reported as taxable. would be great if that is indeed not the case, though

Agree with you 110% on MEC being non-issue in some many situations, especially when clients have large lump sums to put into policies and are already over 60. they are likely considering a NQ annuity anyway, so why is a MEC bad when it is treated just like a NQ annuity while alive, but tax free at death. NQ Annuity is a 4 letter word in way more scenarios than a MEC for sure

 

[Lloyds of Lubbock]

I believe once that money is touched it is a taxable event.
Most companies will give you a 30 day window to put it back.
Taking a loan from a policy does not diminish your basis.
Your money stayed in the policy collateralizing the loan and gets a dividend accordingly.
I am adding two attachments one showing a loan coming out and the other showing the basis of the contract.
I hope this helps you.

 

[Lloyds of Lubbock]

Correction...once the money is touched it is a taxable event providing there is a gain. Sorry for confusion

 

[Lloyds of Lubbock]

Now you got my curiosity up so I called someone in Advanced Planning who is an ex IRS agent.
If there is no gain on the policy the loan is not a taxable event.

 

[Allen Trent]

Taking a loan from a policy does not diminish your basis.

Correct, but if it is a MEC & has taxable gain reported, wouldnt it impact your basis because you would have been taxed on the gains to date & then the repayment would increase basis because you are not putting the gains back as those were already reported as taxable (talking about general run of the mill MEC loans/withdrawals/Collateral assignments)

Even if I use my policy as collateral at the bank, isnt a MEC will be a taxable event on the gains. There is no repayment to the carrier as they didnt issue the loan. So, the carrier would issue a 1099 for the gains on the policy & therefore update the cost basis to a higher amount because the gains would have already been reported.

This is why I think carriers are updating (or supposed to be) the cost basis/taxable gains tracking cost basis when events are triggered like withdrawal/policy loan/collateral assignment/ownership change assignment, etc.

Literally just had a lawyer place a family collateral assignment on a MEC SPWL in 2021 for some legal family planning making one of the kids the collateral assignee of the policy. Tax notice was issued to the mom for 2021 & she was taxed on all the gains in the policy built up & her cost basis was updated to current. Lawyer screwed up & didnt mean to put a collateral assignment on the policy.

 

[Lloyds of Lubbock]

I dont believe so.
I think the taxes you pay and the premiums you pay are two separate items.
This is my opinion, I am not an actuary or a lawyer.
When the loan was taken the basis in the policy did not change.
The tax you paid on the gains would not be picked up by the insurance company.
I do see your point and can envision the admin problems it can cause.
I already bothered the advaced planning guy once so I will pick on an actuary.

 

[Lloyds of Lubbock]

So I just got off with an actuary.
ALAN YOU ARE RIGHT!
He is going to send me a memo on the actual accounting for a situation like this and I will post it when I receive it.

 

[Allen Trent]

I already bothered the advaced planning guy once so I will pick on an actuary.

LOL---I will see what my contacts say on it too. I just know that assignments like bank collateral & ownership change assignment brought Adjusted cost basis calculations to current---IE a grandparent that bought a MEC on kid at birth decides at age 30 to change ownership. Grandparent can get the tax notice on the gains, but grandkid then gets an updated cost basis to current. Same would be if the MEC is a VUL with a loss. Grandparent wouldnt get a tax notice as they have no gain, but the new owner would get updated cost basis to current value & not the original cost basis. However, if the change in ownership happens contractually due to death of owner & the insured becomes the owner, no tax reporting to the deceased owner as the ownership change happened as a result of the contractual language making the insured the owner if the owner dies.