How a 1035 exchange can update a annuity or life insurance policy

"Over the last 10 to 15 years, there have been many improvements to both life insurance and annuity products. If you've been thinking about swapping your current annuity or insurance policy for a new policy, a 1035 exchange might be a good solution." — Lyle Boss

Created by a provision in the IRS code, 1035 exchanges offer a tax-deferred method of converting existing life insurance or annuity contracts to contracts that better fit your overall financial goals. Under 1035 rules, policyholders can transfer money from an endowment, annuity or life insurance into a new policy without paying taxes at the time of transfer.

If you have a life insurance policy or annuity that you would like to upgrade to a better-designed product, you may want to consider the advantages of doing a 1035 exchange.

Do a 1035 exchange to defer the gain

In a 1035 exchange, you are deferring the gain, which is the difference between the cash value of the policy at any time, including all policy loans, and the premium tax basis, which is the amount put into the contract, less premiums for additional benefits and minus any tax-free distributions. If there is no gain in the original contract, you might still take advantage of other 1035 exchange tax benefits. If you surrender the original contract, these tax advantages are not available to you.

What kinds of exchanges can you do? There are different types of 1035 exchanges. These include:

* Life insurance for a nonqualified annuity contract.

* Life insurance for an endowment.

* Life insurance for life insurance.

* Endowment for a nonqualified annuity product.

* Nonqualified annuity for nonqualified annuity.

When could a 1035 exchange be appropriate?

Be sure your advisor tells you all the advantages and disadvantages of this type of transaction and allows you to be the sole decision-maker. The decision to replace a policy should be justifiable based on your economic or personal needs, and you should never terminate a policy until your new policy is issued.

Some things you should consider are:

* If you may have changes in your health that may cause you to be denied new coverage or require you to pay more for coverage.

* Surrender charges could have a negative impact.

* Potential differences in the way interest is credited to your replacement policy.

* Changes in policy provisions and guarantees.

* Alternatives to replacement that you may not have considered.

* The impact of outstanding loans could represent a partial gain.

* The current financial climate.

* Your own goals and desires.

Changes in the stock market and interest rates, better-designed contracts and policies, and changing personal or financial needs are all reasons to speak with your financial expert about whether or not a 1035 exchange makes sense.

However, before beginning the exchange process, you should investigate all your options, understand potential pitfalls and know the long-term implications.

Lyle Boss, a native Utahn, is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.