Have Unneeded Life Insurance or Underperforming Annuity? Trade It In, Tax-Free
Tuesday, November 5, 2019 10:07 AM
Full and Partial Annuity Exchanges Boost Flexibility, Help Achieve Goals
MEDFORD, OR / ACCESSWIRE / November 5, 2019 / If you have a low-paying annuity or a variable annuity that you no longer like or a cash-value life insurance policy you don't need, you're not stuck.
You can make a tax-free 1035 annuity exchange, says Ken Nuss, CEO of AnnuityAdvantage, an online annuity marketplace. You can trade in an entire annuity or part of it for a better annuity at a different insurance company. Or trade in your life policy for an annuity.
"A 1035 exchange lets you switch insurance companies while continuing to defer taxes, ensuring that your annuity stays up-to-date with the latest advantages, benefits and best rates available," he says. "It's one of the few parts of the tax code that works in your favor."
A full 1035 exchange most often involves exchanging one fixed-rate annuity at the end of its surrender term for a better-paying fixed annuity. "You can often get a higher interest rate than the renewal rate offered by your current insurer," Nuss says.
And you can exchange among types of annuities. For instance, if you want to lower your risk, you can exchange a variable annuity for a fixed annuity that guarantees principal. The funds go directly from the current insurer to the new one.
Anyone unhappy with a current annuity that's still subject to a surrender charge can usually take advantage of the penalty-free withdrawal provisions of their existing contract.
Most annuities let you withdraw 10% annually without penalty. Instead of taking receipt of the penalty-free withdrawal amount, you can move it to a new annuity via a partial 1035 exchange, Nuss says.
Many of Nuss's fixed-rate annuity clients move their penalty-free amount annually from a lower-interest-rate product bought years ago to a higher-paying current annuity. Some make partial exchanges from variable and fixed-indexed annuities into fixed-rate multi-year guarantee annuities, also called CD-type annuities.
Caution must be exercised when executing a partial 1035 exchange. There's a special IRS rule when using non-qualified funds (money not in a retirement plan) in a partial exchange. If any withdrawals are made from either contract within 180 days of a partial exchange, the exchange is invalidated and becomes a taxable event.
Life insurance policy can be exchanged for an annuity
Many older people have paid-up cash-value life insurance policies they no longer want or need. Section 1035 lets you exchange such a policy for an annuity tax-free. The owner or owners of the life insurance policy and the new annuity must be identical.
The cash value can be used to buy any type of annuity. One good choice is a deferred income annuity, which will pay an individual or a couple a guaranteed lifetime income starting at a date the owner chooses.
All 1035 exchanges, whether full or partial, require serious thought. "Only after careful examination of available alternatives can you decide if a 1035 exchange makes sense for your individual situation," Nuss says.
AnnuityAdvantage offers a free 1035 exchange-evaluation service that compares an existing annuity to newer products on the market.
For more information and a video, see https://www.annuityadvantage.com/blog/what-is-a-tax-free-1035-exchange.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information, including updated interest rates from dozens of insurers, is available at https://www.annuityadvantage.com or (800) 239-0356.