Policy Loans on Value-added Whole Life Policies


A loan can be taken by the policy owner against the cash value of each Value-Added Whole Life policy they own. The policy owner can borrow up to 75 percent of the cash value of each policy. Loans are not made in the aggregate -- that is, not across the cash value of all policies. Each loan is issued against an individual policy.

Interest Rates Interest is charged at a variable rate and is indexed to the crediting rate. The crediting rate is set each year, or more frequently, by AAFMAA. The policy loan rate is 1 percent (100 basis points) above the crediting rate, and may change each year of the loan, or more frequently, if the crediting rate changes. The crediting rate for 2009 is 7 percent (NOT guaranteed-subject to change). Therefore, the policy loan rate for 2009 is 8 percent. Any money that has been loaned out of the policy continues to earn the current crediting rate, even though the policy owner has taken that money out of the policy. For example, if the policy cash value is $10,000 and the owner takes out a loan of $5,000, they will still be earning the crediting rate on the entire $10,000 of cash value. Interest accrues daily and is billed annually in the month preceding the anniversary date of when the loan was issued.  If unpaid, the interest will be capitalized (added to the loan principal) at the end of the month in which it is due.  Interest will then begin to accrue on the new, larger principal balance.

While you are not required to repay a loan because it is secured by the cash value of the policy, AAFMAA strongly recommends that the annual interest is paid when billed.  This will prevent your policy from becoming ?overloaned.? A policy becomes ?overloaned? when the principal and accrued interest become greater than the cash value of the policy. When this occurs, the policy lapses. A policy lapse will trigger a taxable event if the cash value is greater than the policy premiums paid. This gain is considered ordinary income by the IRS, and AAFMAA is required to send Form 1099R to the IRS for this gain.

Repayment of Loans Repayments may be made at any time, in any amount.  A loan may be repaid in full or in part. Effective Jan.1, 2002, all loan payments are credited to accrued interest first and then to the principal. If you have more than one policy with loans outstanding, please indicate to which policy and which loan, fixed or variable rate, you intend the payment to be applied. Otherwise, the payments will be credited first against the interest on all policy loans, oldest policy first, then against the principal of all policies, oldest policy first.

Outstanding Indebtedness Any outstanding indebtedness will be deducted from the proceeds if the policy is surrendered for the cash value or when the death benefit is paid to the beneficiary.

Tax Implications If your policy is identified as a Modified Endowment Contract (MEC) it comes under the provisions of the Technical and Miscellaneous Revenue Act (TAMRA) of 1988. Unless you are disabled, TAMRA may impose ordinary income tax implications on MEC policy distributions, i.e. loans, withdrawals or cash surrenders, regardless of your age. Also, if you are under age 59 ? a 10 percent penalty tax may apply to distributions. The tax and penalty apply only to distribution of interest earnings. The IRS sequence for distributions is interest earnings first and then principal. No income tax or penalty is applicable to principal.  Principal is the cost basis of the policy. Cost basis is premiums paid plus any taxable distributions made from the policy. You may want to seek professional tax advice.

Remember that a policy loan from AAFMAA is one of the most flexible loans available. Members should always feel free to use this benefit, but should make interest payments to avoid the risk of losing insurance coverage and/or membership.

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