WHEN AN EXCHANGE TO AN ANNUITY IS BETTER

Poor Uncle Sam faced and got a credit rating down turn.  Now, he is going to have to  pay more on his endless debts because the investors handing him money feel he is a greater risk!  So, unless you HAVE TO HAVE money out of your old life insurance policy -- don't give him a free hand out.  He may very well just squander it on something that will just make you mad!

Now, we understand that not every person being motivated to do a review of their current life insurance policy or policies is going to want to do a tax-free exchange into another life insurance policy.  The good news is that the  government has previously provided for this situation where the need for life insurance has waned or reduced since the original time you took your policy out. Maybe the kids are all grown up, the mortgage is paid, and you are near retirement.  Or perhaps, you are already retired and looking for safe investment options that are safe.   

Or, maybe the business life insurance need you once had, is no longer present. Maybe you are the lucky one who won the lottery and the world is now your oyster and life insurance is no longer necessary because you have cash stuffed in your pockets. Dream on, right?

But don't count on the 1035 tax-free exchange law sticking around forever. 

Our current President is looking to tax insurance companies more, and may soon be changing preferential insurance tax-law. If you are going to get on the tax-free exchange train, buy that ticket now! 

Grandfathering matters greatly in past insurance law changes! Please note that you don't have to buy another policy if you want to get away from a bad company or a bad plan.  You can just cash in an old plan if you like. But, if you cause taxable income by your surrender - just remember you are helping your Uncle Sam by allowing a hand out of tax money that could be avoided. Be sure to get our free analysis that includes a tax "basis" study so you can determine if the surrender of any cash values will get taxed.

Section 1035 of the Internal Revenue Code of 1954, as amended, and currently effective, has left you the great option to exchange your current policy into either a life insurance policy or an annuity policy.  This way, your loss or gain in the current plan can be re-invested via a direct transfer without paying taxes on the gain, or losing the chance to use any loss to offset future gains.  And, you can continue life insurance coverage as before in a re-issued plan, or switch to a "money only" fixed investment account instead so all of your values are invested in safe, yet modern and aggressive investment vehicle that allows gains, but stops any future losses of cash or annuity values.

Due to the fact that life insurance policy cash value income tax* "gains" as well as annuity value income tax* "gains" are taxed as "ordinary income", (meaning no real tax favors there), when you surrender them for cash -- using a tax-free exchange allowed by IRS law makes a lot of good tax sense. Unless you need to have some or all of your cash from your old contract, this may be the best option to protect any tax benefits your current plan or plans have. 

Getting a free review, including tax issues, is a must so that you can have a full picture of the cost to cash in a plan that has a gain.  (Normally meaning your cash value has exceeded your premiums paid)  That, versus allowing the funds to remain tax-deferred by doing a tax-free exchange instead.

*  Values are tax free while left undisturbed in either type of insurance company contract.  Taxation of gains is reported upon surrender of the contract.  Use of policy loss's are lost since all ordinary income tax losses are not tax deductible.

Hint:  With heavy stock market losses now sitting inside any variable life plans you may have, you can normally transfer these losses via a tax-free exchange as well.  The loss can transfer and be maintained in a new replacement and re-issued plan to offset future gains in a fixed or indexed universal life plan. This procedure can stop further loss and use the past loss to offset future gains!  (Trust us, your CPA will like that option!)

New provisions effective January 1st, 2010 under Section 844 will allow you to trade your life or annuity contract in for another so that tax-free withdrawals can be taken out if you meet the definition of being disabled!

So, this brings up the best time to investigate and consider cashing in your current permanent insurance policy "Tax-free" and obtain an annuity instead with the cash value. Well, if you no longer need the protection, or want to buy term insurance and invest the difference in a vehicle that does not tax any gains (or if you have a loss, can preserve it as well) -- then the answer would be TODAY!

Do it while you still can and before the bumbling fools in Washington (or the King himself) takes away this important option!!!

 Disclaimer Statements: 

1.  Cash values inside a variable life or annuity plan are protected by S.I.P.I.C. government insurance covering a failure of the company, as long as the funds are invested in variable accounts at the time of demise of the insurance carrier.  Any funds in a fixed account are exempt from S.I.P.I.C.'s reach of protection if the carrier is taken over by the state of domicile insurance commissioner.  State guarantee funds may apply, but also could be exhausted quickly if a run on the bank (mass policyholder surrenders or transfers) takes place with one or more carriers in any particular state.  Past cases of state guarantee funds becoming exhausted quickly dictate a slow and lengthy process for recovery by policyholders or beneficiaries.

2.  Not all policies are eligible for an IRS approved exchange of values. Instead of getting technical on which policies are eligible, we state that most are.  If you choose to do a free review with our firm, this information will be included in your report after a study is performed on your behalf.

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