For Mark Roberts’ Use: It is often said that we should all reevaluate our retirement plans and life insurance policies every few years, to make sure the measures we’re taking are in line with our needs and goals. But what if you discover that your annuity or life insurance policy no longer serves you well, or that a better deal is available elsewhere?
You may be able to find another contract that features lower costs, a higher death benefit, or more investment choices. Keep in mind that the cost and availability of insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before surrendering your “old” life insurance policy, it would be prudent to make sure that you are insurable.
If you purchased your policy years ago and find that it no longer works for you, you may be able to exchange it using a 1035 exchange.
Normally, exchanging a life insurance or annuity policy could trigger negative tax consequences. That’s why a 1035 exchange is helpful. With a 1035 exchange, you can switch to a more beneficial policy while avoiding those taxes.
A 1035 exchange can be complex, and you could incur surrender charges from your old annuity or life insurance policy. You can also do partial 1035 exchanges for a portion of the total contract amount. The transferring company should notify the new company of the exchange amount that is investment versus gain, because any gain is subject to ordinary income taxes when withdrawn. Also, some companies do not recognize partial 1035 exchanges for tax reporting purposes, so remember to fully investigate your options before making a final decision.
A tax professional should be consulted to properly operate your 1035 exchange. It can be a tricky business, but worth it if the benefits of your new annuity or life insurance policy far outweigh the benefits of your old contract.