|
|
 |
 |
 |
 |
 |
In Reply to: Re: Re: Re: Re: Re: Re: Re: Re: taxable cash value insurance posted by JAX on February 26, 2003 at 11:54:10:
Jax,
If monies are in a variable account (equities, bonds, etc...) the loan ratio at Canadian Banks will be between 50 and 70%. Canadian banks are quite comfortable lending money using a cash value life insurance policy as collateral. Canada Life, for example, has a preferred lender arrangement with National Bank. If funds are in guaranteed investment vehicles within the UL plan (there is no real differentiation between UL and VUL in Canada) then the max. loan ratio is 90%. As long as the loan remains below 90% of the policy's cash value, everything is just fine in the bank's view. Most people leveraging their insurance policies will switch to guaranteed investments as their loan ratio reaches the equity limit. In Canada, the tax-advantaged retirement plans allowed are much more limited than those in the United States, so a leveraged life insurance policy is a common tax-shelter for those who have already maxed out their RRSP limits. The policies are routinely assigned to the bank which guarantees repayment.
Policy loans (in Canada) can trigger a taxable event because under section 148 of the Canadian Income Tax Act (ITA 148 (1)) because it is considered a disposition. Accrued interest also constitutes a disposition under the ITA. Of course, once the outstanding loan exceeds the ACB, the excess is taxable. Since in many level cost of insurance plans the ACB will begin to decline (in Canada anyways), the loan will eventually exceed the ACB even if the loan amount remains level. Not only that, but in Canada, loans are looked at proportionally, so if you have a CSV of $2,000, ACB of $1000, and you take a policy loan of $500, then $250 of the loan is considered taxable income. When the loan is repaid you can recover the tax paid. Because of the current Canadian Taxation system, the bank route is preferrable to that of a direct policy loan.
Because the highest Canadian income tax rate is close to 50%, there is a natural obsession with tax planning. "Insured Retirement Plans" (or whatever each company calls their own version of the idea) are very popular for people earning more than $150k a year.
GP
: :
: Do you realize that we are talking about a VARIABLE U.L.?????? That is an equity product.
: Have you ever talked to a bank in Canada about using the policy for collateral?
: Why are loans a taxable event??
: Banks do not want to make those kinds of loans.
: As I said, IN CANADA, it is preferable to go to a bank. A 90% ratio is the max allowable for someone with all cash values in guaranteed investments. The interest rate will be close to prime instead of prime + 3%. The loan does not require repayments as the payments are added to the outstanding balance (just as it would for a direct cash value loan from the insurer). In CANADA, policy loans are looked at on a pro rata basis, and will eventually trigger a taxable event. Since in Canada policy loan interest is deemed to create a new loan at the end of each year, the accumulating interest can trigger taxation.
: : I don't know which banks where you are that would loan against a life insurance policy. I would figure that since the cash value is a bona fide asset, there would not be a problem using it as collateral.
: : Anyways, if banks in the US will not loan against the cash value of an insurance policy, why not? Is it by law, or just a business practice?
: : GP
: : : :
: : : I bet no bank in the US will loan 90% of the total cash value when the cash value goes up and down on a daly basis. What interest rate do the bank's charge?
: : : What banks loan money against the cash values on variable life ins. here in the US?
: : : You said it was preferable to borrow from a bank, but you have to make payments on the loan at the bank, but you do not have to make payments on a loan with the insurance company.
: : : If you borrow from the insurance company, it is not a taxable event unless the policy is a MEC.
: :
: : :
: : :