Loan from Insurance Policy

[Lori Foresz]

Hi,

I have read the threads regarding the reporting of the cash surrender value of life insurance contracts on the Form 5500. We generally report them especially if it is a takeover situation in which they have been reported in the past.

Question. A participant took a loan out against the policy, presumably to pay the large $20k a year premium required on the policy. The cash surrender value went down considerably, I presume because of this loan.

Would it be appropriate to include the loan form the policy as a plan asset as well?

If anyone has any thoughts, please let me know.

Thanks!!

[Guest jashendo]

lgolden --

When you say "loan against the policy", I assume you mean a loan from the plan, qualifying under the plan loan rules (both tax and prohibited transaction). Correct? If so, then yes, it should be reported as a plan asset, just as any other plan loan.

If not (that is, if the loan does not qualify under the plan loan rules), then you would have other issues to resolve, such as why it should not be treated as a distribution.

[Lori Foresz]

Hi,

I guess I was thinking there was some "special" way to take a loan against the policy that somehow didn't have to satisfy 72(p). I don't know that much about the mechanics of life insurance policies. Can it be a loan from the insurance company and not against the policy? I guess that's what I was thinking. Does anyone know how these work?

Many thanks!

[Guest PLHart]

No plan loan or distribution has occurred in this scenario. Instead, within the plan the trustee (for the benefit of the participant) has simply borrowed cash value of policy to pay premiums due.

The market value of a policy is the cash value of the policy minus any outstanding policy indebtedness (the amount you would receive if you surrendered the policy) and that is what we would carry as an asset on the balance sheet.

[Guest jashendo]

PLHart ---

That's what should have happened, or could have happened, but that is not what lgolden said.

Or do you know about the situation?

If it is as you described, then I agree, all is well. But I've seen "policy loans" effected in more -- let's call them "creative" -- ways.

[ljr]

Then there's the question of whether the plan should have paid the premium by borrowing against the policy's cash value. I believe there are some issues with this type of transaction in a qualified plan but cannot recall the details.

[Lori Foresz]

Hi,

I wasn't exactly sure what happened, but we will call the broker and find out if the trustee simply borrowed against the cash value of the policy to pay the premium or if it was a more "creative" transaction.

What was odd is that the cash value of the policy reported on the statement went down almost as much as the outstanding loan. So, it looks like the cash surrender value has already been decreased by the policy indebtedness. Seems odd. Will check it out. Thanks!

[TCWalker]

I guess the missing info includes whether the insurance contract is held inside or outside the trust.

[ljr]

Hello, lgolden. The insurance company should be able to tell you the cash value of the policy and the exact amount of any loans. Assuming the loan is within the policy (which is probably the case but needs to be determined for sure). So, the net cash surrender value is as was said, the cash value minus the loan. Interest will continue to be due on the loan and if not paid is added to the loan balance as long as the policy has enough cash value. The insurance agent is probably still collecting renewal commissions and should be able to easlily provide the information needed. As to how to report on the 5500, can't help you there.