Solutions 4 Financial Independence: 06/21/18
Question: I took a $100,000 loan out of my paid up life insurance plan. I am thinking about taking money out of my IRA account to pay this off. Would this be a smart decision?
Answer (John Halterman-Beacon Wealth Management): “The first thing you have to realize is what are the potential consequences of doing something like this?
When you take a loan out against your life insurance, technically you do not have to pay it back. What would happen is that it is going to gain interest every year and they’re also going to charge you interest. Some of these end up washing each other out, but others do not. What happens is if you don’t pay it back then the money goes against the death benefit at your death.
For simplicity, if you had a $150,000 death benefit, and let’s say you had $125,000 cash value, as long as there is cash value in there we are still going to be a life insurance policy. What happens is that the loan reduces the death benefit on a lot of these. And that example, she owed $100,000, then she would have to reduce it by the 100 and that’s what you would get in death benefit.”
Question: Should she pay it off?
Answer (John Halterman-Beacon Wealth Management): “There is a little extra caveat there, and that is we are talking about taking money from an IRA, which means she has never paid taxes on that money. In order to pay off $100,000 loan, she would probably have to take – depending on her tax bracket – it is going to add $100,000 of earned income to her. That means her tax bracket is going to be 20 to 30%. In that case, she’s going to have to take $150,000 out potentially, to pay off the $100,000 loan.
Here you are, you’re faced with a situation where you don’t have to pay it back but then you’re going to create a tax consequence to them. You have to really consider what that impact is and how much total money.
Should she pay it off? I think it is going to be individualized. If she doesn’t need the death proceeds I would not consider paying it off because it’s going to wash each other out in the end.”