Winning In Overtime With Unneeded Life Policies
“I went to a fight the other night and a hockey game broke out!” The famous one-liner by the late comedian Rodney Dangerfield finds it humorous foundation in the reality that those athletes on skates are resourceful in finding occasion for fist-a-cuffs.
But the sport offers a life lesson in making the best of a bad situation. If a team wins a game in regulation it is awarded two points in the standings and the loser gets nothing. But if a game is tied even the team that loses in overtime or a “shootout,” gets one point.
As an insurance advisor don’t miss the opportunity to make the “loss” a client may have in an unneeded policy into a positive transaction.
Example: Your client has a life policy into which he or she has paid $50,000 in premium and has a surrender value of only $10,000. The policy requires too much to maintain or is no longer needed.
But rather than tossing in the towel, suggest using the policy loss to earn some tax-free money! Consider:
- Swap the policy for an annuity in a 1035 exchange.
- Section 1035 allows for transfer of both the cash value ($10,000) and the old policy tax basis ($50,000) into the new contract.
- Account values in annuities are taxed only to the extent of gain in the contract, the exchanged-for annuity allows room for $40,000 in growth before there is any potential income taxation on full surrender.
- Additional premium can be contributed at the time of the exchange allowing for quicker loss recovery (e.g., $20,000 new premium results in an initial policy value of $30,000 and initial tax basis of $70,000 – loss in the policy is not affected!).
A 1035 exchange to an annuity is not without its hoops and details, so contact Tom Virkler, JD – Director of Advanced Markets, at tom@cpsadvancedmarkets.com or 706-614-3796 concerning these and any opportunities for increasing your annuity business.