IUL Wash Loan

[rjl]

Given that policy langage below, if I take a $100k loan during year 10, is that $100k loan locked at 3.5% until it's paid back OR will the interest rate on said adjust down to 2.0% at year 11?

"Interest charges accrue daily on any Loan Indebtedness at the current annual loan interest rate". Year 10 interest charge is 3.5% Year 11 interest charge is 2.0%

 

[dinkold]

@rjl Based on that language 'any loan indebtedness at the current' would mean that all indebtedness is charged at the current interest rate. So 3.5% for the remainder of year 10 and dropping to 2.0% in year 11. However there is other language that applies if it is a wash loan as you should be getting 3.5% on that borrowed money in year 10 and 2.0% on that money in year 11. Do recognize that a wash loan is not really a complete wash as the timing of the interest contribution and the loan interest are slightly different.

 

[rjl]

@dinkold Here's the language on the timing of the interest credits and charges. So I wind up being a tiny bit in the red....is that right?

LOAN ACCOUNT If You borrow against Your policy, We will transfer the amount You borrow into Your Loan Account. The effective date of the transfer is the date of the loan. Your Loan Account will be credited with interest from the date of the loan. The Guaranteed Minimum Loan Crediting Rate on Your Loan Account is shown on the Data Pages. The interest rate is an effective annual rate. interest is nonforfeitable except indirectly due to surrender charges.

LOAN INTEREST CHARGE Interest accrues daily. Once credited, Interest charges accrue daily on any Loan Indebtedness at the current annual loan interest rate. The Guaranteed Maximum Loan Interest Charge is shown on the Data Pages. Interest is due and payable at the end of each Policy Year. Any interest not paid when due is added to the Loan Indebtedness, accrues interest at the same rate and will not initiate a new Sweep Restriction Period.

 

[dinkold]

@rjl Yes, there is usually a slight timing issue with the credits being either once/year or once/quarter and the interest charged being continuous. But that is a minimal difference. The main thing is that the numbers match. 3% credit for instance with a 3% loan interest amount. And if the IUL is overfunded for potential cash value usage later in life I would insist that it have a no lapse guarantee also.

 

[rjl]

@dinkold Yes, they match....2% charge and 2% crediting. The policy has been max funded. There is a no lapse guarantee but only through year 10. However, there is a life paid-up rider (overloan protection) that is available starting in year 15.

I won't need to take a loan, so lapse won't be a risk. Was just curious if the interest charge would change in year 11, similar in the way an adjustable rate mortgage changes.

 

[dinkold]

@rjl I expect it will change from the 3.5% to the 2% to match the crediting rate. I would expect it would be to your advantage to take a loan but that is a question best addressed to your agent more in the policy year 20+ range.

 

[ativyl]

@dinkold I think by wash loan he means direct recognition loan. Generally they are break even (or very slightly in your favor) after year 11 and profit centers for the insurance company years 1-10.

 

[dinkold]

@ativyl Direct recognition is a whole life dividend loan system. A wash loan on an IUL is where the interest credited to the loaned amount is equal to the interest charged on the loaned amount. However the timing of the credit and charge are slightly different so it is not a true 'wash' but a paper numbers wash. I would never sell an overfunded IUL unless it had a wash loan and a no lapse guarantee to maturity.

 

[ativyl]

@dinkold I have a good wash loan but no no-lapse guarantee. I want insurance expenses as small as possible. Worse comes to worse I pay the margin call, though extraordinary unlikely. Wouldn't be the first time.

 

[shaimaaalmahdy]

@rjl I'm going to try and make this easy for you.

Post the illustration.

 

[pastorsamukelisiwe]

@rjl The problem with taking a loan out on your policy is that if something happens to you while that loan is outstanding they will take that money out of your death benefit. Interest rates can change. Since you are planning for 10 years from now you would be better off starting a separate investment from you life insurance where you will get a higher rate of return building up your money in your account, a higher return than any cash value policy would give you. Then when you need money you can take that money out without paying interest out as a loan of your our own money. With cash value policies your money belongs to the insurance company not to you. Get a separate investment that belongs to you and you don't have to worry about paying interest or leaving our family unprotected. I am licensed in both insurance and investments and would be glad to help you more.

 

[gill82]

@rjl Don’t forget policy charges. The loan rate and crediting rate on the collateral might match, but the policy charges might eat into the net amount.