Experts warn against using universal life for retirement income

Withdrawing money from or leveraging against a universal life insurance policy for retirement income purposes can cause many problems for policyholders, say experts. Tax pitfalls and complex loan programs must be considered carefully before recommending these strategies.

Although the option to borrow against a universal life insurance (UL) policy, a pace that is called leveraging, offers tax advantages, Bruce Cappon, broker and founder of First Rate Insurance, says it is so precarious, that only ten to 15% of the population could handle the sophistication that is needed to understand the ins and outs.

If the bank calls the loan or the policy falls off track, there could be a major tax liability to this retired person, adds Mr. Cappon. "The bank would take all the cash value and then the government could be wanting hundreds of thousands of dollars that's accumulated in a deferred tax reliability. It may lead to bankruptcy. This leveraging, which I think is going to be a bad idea for most people, will invite in the long run a lot of bad publicity and lawsuits."

However, leveraging is the method that is most often promoted, says Ashley Crozier, broker and independent actuarial consultant. There is a cash value of a certain amount and the insurance companies have already negotiated with banks in order to set up the borrowing, he explains. The amount a client can borrow depends on the bank and the insurance companies, but Mr. Crozier says it usually varies from 75% to 90% of the as surrender value.

According to a survey conducted by The Insurance Journal and published in May 2002, most banks limited loans to 50% for equity and 90% for fixed income.