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Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us. Ignorance and Whole Life Policy Loans Are a Bad Mix "Participating whole life is a bit like a long marriage. Both need understanding and tending to, because terminating either one can be very expensive." Many participating whole life policies are versatile and attractive life insurance assets, but inattention to policy loans can be dangerous. Matt contacted me several months ago because he was facing an income tax bill of $365,000 due to his participating whole life policy about to terminate because of a $900,000 policy loan. Taxable income is calculated as the policy's net cash value (zero when it terminates) plus the policy loan less the cost basis. Matt hadn't paid much attention to his policy, even less to tax rules surrounding life insurance and only recently became aware of the massive potential tax liability he was facing. Matt believed he could simply let the policy terminate without consequence. Matt acquired his participating whole life policy in 1985 at age 42 with contract premiums of $20,000. At 67 Matt is slowing down his law practice and wants as little out-of-pocket costs as possible while avoiding the impending policy termination with its enormous tax bill. I structured a redesign by reducing the face amount of the policy and eliminating the loan amount by the cost basis of about $545,000. This brought the contract premium down to $7,500 and the loan down to about $365,000. Loan interest is $23,725 but can be substantially offset each year by using dividends to reduce this cost. The policy's death benefits are level at $525,000. Participating whole life is a bit like a long marriage. Both need understanding and tending to, because terminating either one can be very expensive. Matt's policy was sold in 1985 as minimum deposit that featured paying four out of the first seven premiums, borrowing the rest, paying annual interest and taking a tax deduction for the loan costs. Three problems with this. First, Matt didn't understand he was to pay interest, and most important the agent didn't manage this complicated design for him. Secondly, the interest deduction was eliminated in 1986 - a fact the agent didn't bring to Matt's attention. Finally, the dividend rate was 12% in 1985 and is 6.5% now. Matt had two contacts with the agent since 1985. One was in 1993 when the agent informed Matt he had to pay some premiums to keep the policy from terminating. The other was last year when the same message was delivered, but this time the cost of keeping the policy from terminating had gone up enormously. Matt is livid because he believes the agent and company are culpable for not properly managing his complicated policy design. Unfortunately consumer ignorance for properly maneuvering such life insurance programs is nearly unanimous. The vast majority of Matts misunderstand how complicated some life insurance designs are and how alone they are in fending for themselves. (For a broad view of policy loans see August 2009 Perspectives at www.peterkatt.com).
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