What is the 1035 Exchange?

What is the 1035 Exchange?

The 1035 exchange is a tax-free transfer of cash values from one insurance contract to another.  The exchange also carries the cost basis from the old contract to the new one.  Functionally speaking, the 1035 exchange is a great strategy current life, endowment, and annuity policyholders can use to purchase a new policy with better features than their old policy while bringing over the value from the old policy with no tax consequences for making the change.

However, there are several important rules you must understand before you decide to replace an old insurance contract using the 1035 exchange.  Ignoring these rules could result in unfavorable consequences leaving you worse off.

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TEFRA DEFRA TAMRA: How Taxes Effect Life Insurance

life insurance policies have tax rules

Life insurance enjoys some unique tax benefits, but it also faces limits imposed by legislation we know as TEFRA DEFRA and TAMRA.  These pieces of legislation established specific guidelines as to what you can and cannot do with life insurance.

Each of these pieces of legislation creates rules that agents, policyholders, and people looking at whole life or indexed universal life insurance (or any UL product) should know.

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The Power of Whole Life Insurance in a Down Market

 

A few weeks ago a client of ours (we’ll call him Ted to protect his identity) reached out to us looking to take a policy loan from a whole life policy he owns.

A unique and, arguable rare, opportunity arrived on his door step (literally) and he needed cash. The interesting part of this story, though, is not that whole life cash values were available to him so that he could seize the opportunity but rather that he had plenty of other money he could have used instead.

There was just one problem,

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Life Insurance as an Income Producing Asset with the Power of Leverage

 

We’ve talked a lot about using life insurance as an income producing asset. Many people stumble a bit when they first attempt to wrap their head around the notion of using “insurance” either as a place to save money or as an asset from which they can generate income. 

I raised an eyebrow or two when first presented with the idea. Today’s discussion is not an introduction to the concept of using life insurance as an income source, but rather a somewhat advanced look at why it can work so well.

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Sequence of Returns Risk and Indexed Universal Life Insurance

We’ve addressed the subject of sequence of returns risk in the past. We’ve even discussed it on the new Insurance Pro Blog Podcast. This subject has become a hot topic in more recent years as financial advisors now struggle to build retirement income plans for their clients and face the problem that few, if any, training programs touch. Why isn't their more specific training for advisors on this issue?  Speculating about that would be an interesting topic for another day.

Today, I want to talk about how indexed universal life insurance is affected by sequence of returns risk especially in the context of using a policy to generate retirement income.

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Argument against Permanent Life Insurance: Lack of Fee Disclosure

In our final installment of the five most common arguments made against permanent life insurance we’ll take on fees or the lack of a discussion about fees, as high fees were already discussed.

The claim here is that life insurance contracts are very non-transparent regarding fee disclosure and you never really know what you are signing up for until long after you paid several years worth of premiums.

This argument, like several others, isn’t entirely unfounded. But it takes a large degree of liberal interpretation to the extreme.

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Argument Against Permanent Life Insurance: They Steal your Cash when you Die

This weeks edition of senseless arguments levied against whole life insurance and universal life insurance is one my very favorites.

Even though I’ve addressed this topic before, I couldn’t pass it up knowing I’d be writing a series on the most common “complaints” used to dissuade the buying public from these products.

I do have to admit right out of the gate, though, that this one has a shred of truth behind it.

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Argument against Permanent Life Insurance: Low Rate of Return

The rate of return argument against permanent life insurance focuses mostly on an irresponsible comparison of dissimilar asset classes.

Chances are good that most of you reading this understand that there is a relationship between the risk of an asset and it’s return; the two are positively correlated. This means the riskier an asset is (i.e. the more volatile it’s returns and the higher the chance you lose money if you buy it) the higher it’s long term rate of return is hoped to be.

People tend to be pretty comfortable with understanding that

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