Suddenly, seniors faced premiums on insurance they didn't need and couldn't afford. It wasn't unusual for a senior to take out a $5 million policy, citing estate tax purposes. The premium on that policy could be $200,000 a year.
Sure, they could stop paying premiums and drop the policies, but most had signed documents agreeing to repay at least 25% of the first two years of premiums, plus interest. At the end of two years, the senior would owe $100,000 plus interest, adding another $6,000 to the tab.
Forgiven loans taxed: If the senior manages to pay off the guaranteed amount, plus interest, the lender will "forgive" the balance and additional interest. However, the policy holders will owe taxes on the forgiven debt.
If $300,000 plus $18,000 in interest was forgiven, a senior in the 35% tax bracket would owe an additional $100,000 in taxes on this phantom income.
Marc Sheridan and Don Tolep of Sheridan Wealth Advisors in Bay Harbor, Fla., say they're seeing more seniors facing financial ruin with these loans. They say the Internal Revenue Service might be collecting as much as $1 billion in taxes on this income.
It's estimated that more than 10,000 of these "spin life" policies were sold in recent years. It looked like easy money for those willing to "share" their insurable capacity. Now they're learning an expensive lesson. And that's the Savage Truth.
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