Brian Gruss Licensed Insurance Planner

Section 1035 Exchanges for Life Changing Situations

A recommended annual review of your financial plan may reveal good reasons to make changes to your insurance coverage and annuity investments, including the replacement of existing policies.  These reasons can range from a change in the financial stability of your present carrier to changes in your financial goals or your personal situation.

Personal reasons can include a divorce or death of a spouse, or you may wish to take advantage of lower rates now available because of a change in mortality tables.  Perhaps you’ve changed your lifestyle and your improved health risk warrants a lower premium than you originally qualified for.

Because simply cashing out life insurance and annuities can result in large lump sum distributions triggering a substantial tax liability, consider using a tax-free exchange under Section 1035.

Section 1035 allows a policyholder to transfer into new policies while still retaining the original tax basis of the older policy and deferring any gains made since its inception, provided certain guidelines are followed.  In the case of life insurance, the new policy must be on the same person.  In the case of an annuity, the annuity must be payable to the same person as in the original contract.

Section 1035 can also be used to exchange a life insurance policy for an annuity policy, with the stipulation that the annuity must be payable to the person insured under the life insurance policy.  This is a useful tool in the case of a life insurance policy that has outlived its purpose.

Consider the following example:

Mr. Smith purchased a whole life policy as a young man, with the intent of protecting his family in the event of a premature death.  Thankfully, he’s lived to retirement age, and his children are now grown and doing well, so he’d like to use the accumulated funds to help produce income for his retirement.  Rather than cashing out the policy and taking an immediate hit on the taxable gains, the policy can be converted to an annuity under Section 1035.  The exchange does two things for Mr. Smith:  It provides an additional boost to his retirement income and allows the taxes on his gains to be spread out over the life of the annuity payments.

Summing it up, should it become necessary or beneficial to alter your insurance coverage or annuity contracts, the use of a Section 1035 exchange can result in significant savings for the policyholder.

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Fixed annuities can offer fixed interest rate accumulation and guaranteed income and help maximize the wealth you pass on to your heirs. With an annuity’s fixed rate of return, you can protect your principal and predict your earnings, which are not taxed until you withdraw your money. Fixed annuities are considered to be a more conservative investment option than variable annuities. Funds in fixed annuities grow steadily, and are not subject to downfalls in the stock market. Fixed annuities offer a guaranteed payment, with the payout amount based on the assumed future returns of the investments and the annuitant’s life expectancy. The payment can be fixed for life, or can allow for future increases.

Fixed annuities are regulated by state insurance departments. Fixed annuities are not securities and are not regulated by the SEC. Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Fixed annuities are designed to provide retirement savings and , at your option, a guaranteed income stream. Most fixed annuities offer a choice of methods to receive income, one of which usually guarantees an income stream for life.

Fixed annuities pay a “fixed” rate of return. The monthly payout is a set amount and is guaranteed. Fixed annuities can potentially pay more than I Bonds, because insurance companies can invest in higher-yielding assets. Insurers’ portfolios that support fixed annuities are primarily invested in publicly-traded and privately-placed corporate bonds and commercial mortgages, which have a higher yield than Treasury securities of comparable maturity. Fixed annuities are designed for long-term investing to help meet retirement and other long-range goals. Fixed annuities are not suitable for short-term goals because substantial tax penalties and early surrender charges may apply if you withdraw your money early.

Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company. Typically, a minimum annuity benefit is also guaranteed. Fixed Annuities: Fixed annuities are backed by highly rated insurance companies which guarantee your principal amount deposited. Subject to the claims paying ability of the issuing insurance company.) Because you earn compounded interest on the money that would have gone to pay taxes, savings grow faster than they would in a taxable investment at the same rate. Fixed annuities are a way for you to save for your retirement. Basically, it’s a contract between you and an insurance company.

Call Brian to see if a fixed annuity is right for your unique situation call 509-218-7329

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