If you have accumulated significant cash value within a Permanent Life Insurance policy, congratulations!
The planning and decision-making you have made to save within such a policy are likely paying off.
Thanks to the tremendous tax advantages that Congress has given to provide incentives for families to protect themselves with life insurance. And to the protection aspect itself, a life policy is a great place to keep the money.
That said, let’s look at some of the most common options for dealing with your policy’s cash value:
Let life insurance be life insurance. Your money is growing tax-deferred within the policy. And in the event of your death, an amount much greater than your current cash value will generally pass to your heirs, tax-free.
That’s a significant benefit right there, and a compelling reason not just to let your policy grow, but to add more premium to it if you can.
Borrow Against The Death Benefit
You can withdraw accumulated dividends, and then borrow against the rest of it, generally with no tax consequence, as long as you don’t completely surrender the policy.
Interest will accrue, but you don’t have to repay the loan yourself unless you want to. If you don’t pay it back, the insurance carrier will simply subtract the balance due from any death benefit they pay to your beneficiaries.
Cash Out The Policy Altogether
This option lets you get substantially all the cash in your policy. However, you may be subject to capital gains tax to the extent your cash value exceeds the amount you paid in.
But it is important to note that completely surrendering your policy means you are giving up your death benefit. Your beneficiaries will no longer receive anything from the policy in the event of your demise.
Exchange For Another Life Insurance Policy
If you choose, you can execute a Section 1035 exchange of one life policy for another, tax-free.
You may opt to do this if you find ongoing premiums at a new carrier are lower for some reason, or if you want some specific protections or riders you can’t get from your old carrier.
For example, you may be able to exchange a straight-ahead Universal or Whole Life Insurance policy for a policy that also provides a benefit in the event you need long-term care insurance.
Section 1035 Exchange Explained
The Internal Revenue Service (IRS), through the 1035 exchange IRS code provision, allows an existing life insurance policy to be transferred to another policy of the same kind – tax-free!
Thru the 1035 exchange provision, the IRS allows for an existing life insurance policy, annuity contract, endowment, or long-term care product to be transferred to another one of like kind free of tax. In order to qualify for a Section 1035 exchange, certain requirements must be met by the contract or policy owner.
IRS permits both full and partial 1035 exchanges, although some rules are different depending on the insurance company. Normally, given that the criteria set by IRS for the exchange are satisfied, reporting for tax purposes is not required for 1035 exchanges between products within the same company.
Exchange For An Annuity
You can also exchange a life insurance policy for an annuity, tax-free, under Section 1035.
You might choose to do this if you decide you no longer want the life insurance protection, but you do want regular and reliable income.
For example, if your beneficiaries are grown up and no longer rely on your life insurance death benefit, you may execute a 1035 exchange to a lifetime income annuity – maximizing your income over your expected lifetime, rather than paying a large death benefit.
You can choose a joint and survivor annuity to guarantee income to your spouse as well.
An annuity is a policy issued by an insurance company in which the owner of the policy can either make a lump-sum payment or series of payments. The goal is to have a reliable and regular income for the policy-owner. You can choose to start receiving regular disbursements from your funds for a specific period in the future or immediately.
An insurance product for couples, a joint and survivor annuity could be one of the best options if you plan to make a 1035 exchange. As long as one spouse lives the policy will continue to pay. Upon the death of both annuitants, there are also arrangements for making payments to a beneficiary before the principal has been exceeded by the monthly payments. Similar to other annuities, an advantage of a joint and survivor annuity is the provision of a regular income stream to people who are able to live longer than expected.
But it is very important to consider the tax treatment with any annuity. While the balance grows without being subject to tax, the disbursements that the annuitants receive are not tax-free but subject to income tax.
Life insurance is among the most flexible and powerful resources you can have in your portfolio as you grow more established. But to have all of the above options later in life, you must plan ahead now.
Talk to us today. We can help you develop a plan that meets your needs and financial objectives.
To find out more about Whole Life Insurance and to get a free and confidential quote, call the professionals at BBIFinancial at (800) 958-1525 during normal business hours or contact us through our website www.BBIFinancial.net more information.