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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76386  
Subject: Re: Hi gang... wow!!! Date: 9/16/2013 11:37 PM
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Believe it. If you borrow the $900,000 from your bank, collateralized by the IUL, the insurance company would have no basis to withhold your full credit on the $1M. Same regardless who makes the loan
Okay, I'll take your word for it. That's a great deal. Much better than the deal you get with a 401K loan.

Nope;
1. the interest charge accrues, it is not taken out of the credited cash value account.
2. no margin calls. If they ever accidentally lend too much (which doesn't happen, but if they did,) they simply stop lending on that contract.


Okay, the interest accrues in a side account. Got it.
No margins calls, that's cool.

But it really doesn't answer my question. It wasn't about them accidently loaning too much (which they apparently can't do), or declining to lend you more.

I always want to look at a simple worst case scenario.
Accnt worth $1M, you do a one-time borrow of $900K. The interest on that is $50K/yr.

The market has a down year, you get no gain. Your account is $1M, with a $900K loan and $50K accrued interest somewhere on the books. The Net Value is now $50K.

Next year is down also, so you get no gain. Account is $1M, $900K loan, and $100K accrued interest on the books. The Net Value is now $0. Zero.

Bad luck, the next year is down also. Account is $1M, $900K loan, and $150K accrued interest on the books. Net Value is -$50K. Below zero. Actually, any return under 5.5% will put you negative.

At that point I believe you are in deep sh*t.
"if the amount borrowed plus interest ever equals or exceeds the cash surrender value, the policy can terminate"
"An outstanding loan is generally treated as an amount received if a policy is surrendered or lapsed and may result in taxable income. Any gain realized is taxable at ordinary income rate."

Looking at the sheet you (Dave posted), the account value hits $1M after 44 years. The total premium paid is $1800 * 44 = $79,000. So the IRS says you have a taxable gain of $920,000.
In 2013 that puts you in the 39.6% tax bracket, so the IRS will be wanting a check for $364,320.

Tell me again that there is no risk with an IUL.
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