As life unfolds, our financial goals and needs may alter over time. Thanks to the 1035 life insurance to annuity rule, individuals can adjust their existing policies into something better aligned with their changing circumstances without incurring tax liabilities as a result.
A 1035 exchange is designed to transfer assets from life insurance policies into an annuity and then convert that annuity into a lifetime income stream. While a fixed annuity might provide guaranteed lifetime income streams, others might find the more flexible approach of an indexed annuity more appealing.
Though 1035 exchanges may provide attractive returns, it’s wise to work closely with an advisor to evaluate your options and select an annuity that meets all your specific needs. Furthermore, legacy benefits should also be carefully considered, since some older policies feature guarantees which cannot be transferred over. Lastly, any outstanding loan balances could trigger a tax event during an exchange; accordingly it’s crucial that any outstanding loans be settled first, along with fees and costs associated with any proposed annuities before proceeding with their transaction.
In order to meet all the requirements for an advantageous 1035 exchange, an annuity contract must meet special criteria in order to receive favorable tax treatment. For instance, long term care annuities must match up their payments to reflect remaining life expectancies of their original policy owners. It’s crucial that any company offering new annuities are willing and capable of meeting this standard since failing to do so could incur severe tax penalties.
Additionally, any new annuity must meet all of the IRS’ special annuitization requirements, such as mandatory minimum distributions, minimum withdrawal rates and actuarial value reduction provisions. Many newer contracts offer enhanced living benefits over older contracts such as increased withdrawal rates and investment options; additionally they typically incur lower annual expenses than their older counterparts.
Key to any successful 1035 exchange is matching names on both annuity contracts to avoid any confusion about which policy will receive funds.
If you’re considering the transfer of life insurance into annuities, it is essential that you work with an experienced financial advisor in order to ensure the process goes smoothly and adheres to IRS regulations. If you would like more information about 1035 exchanges or would like a consultation about your own situation, reach out! We welcome inquiries at anytime!
*These articles should only be taken as generalized advice. Individuals seeking professional guidance regarding their personal finances should contact a certified public accountant directly for guidance regarding specific investments or circumstances. Please keep in mind that variable annuity investments carry risks associated with investing, including potential loss of principal. No guarantee can be given of success or protection against loss.
**As of summer 2012, only two companies accept 1035 exchanges as long term care insurance coverage (Genworth and MedAmerica). Other policies may allow an annuitization process with subsequent cash transfers into new long term care policies.