You’ve heard me talk a lot about doing policy review in the past. I still believe there is a lot of opportunity in doing policy review of both term and universal life policies. Term,because there are a great many insureds with term life insurance that are nearing the end of their level premium periods and either need to convert or look at alternatives. Plus, the younger you reach out to your clientwith the need for permanent life insurance,the lower the cost over their lifetime.
This particular post is about the reviewand exchange of permanent life insurance. As I stated earlier, there are still a large number of life insurance policies that need to be reviewed. Any universal life policy that was written prior to the year 2000 may not be performing as it was originally intended because of the interest rate environment. These policies are in danger of lapsing unless something is done. One option, if your client is still insurable, is to look at alternative coverage. Using the cash in the current life insurance policy can be a great advantage when looking at a new, more modern life insurance policy. Here are some of those advantages:
- Reduction in premium – utilizing a lump sum 1035 exchange can help to reduce the ongoing premium in a permanent life insurance policy. This coupled with better mortality cost in a new life insurance policy could make a new product more affordable.
- Transfer of cost basis – the cost basis (premiums paid) is transferred from the old life insurance policy to the new policy when doing a 1035 exchange giving the policy owner more return of tax free withdrawals if needed.
- Avoiding any taxable gain – when a 1035 exchange is utilized in the transfer of the cash value, if there was gain in the prior policy, the gain will transfer directly into the new policy and not be taxable to the policy owner.
- New product may have more desirable features – our new more modern life insurance policies offer a variety of added benefit that an old life policy does not, including terminal illness riders, chronic illness riders and long term care riders. All of which can be very advantageous for your client to have.
1035 exchange is not always the best way to go, but it does have its advantages. Remember, there are certain specific guidelines that need to be met for a proper, tax advantaged exchange, so make sure you talk with a trusted advisor if your have any questions when considering an exchange for your clients.