1035 Exchange for Term Policies

[yelchevelle]

I feel like I know the answer that most people on here are going to give me is a resounding NO, but I thought that I would ask anyway. I have a prospect that I scheduled to meet with next week. He thought that his policy was permanent, and it is not. It is set to expire in the next 5 or 6 years. The prospect is mid seventies and is in perfect health according to what he tells me. He has paid a significant amount of money into his term policy, and I remember reading on the old top gun website that some companies would allow a 1035 from a term to preserve basis. I never remember seeing any details of how or who would do this, but it stuck in my head that it could be possible. Does anyone know of any companies that will allow this. There is a good chance that we will be looking at a GUL, and at that point, it wouldn't matter because we are not looking at withdrawals. But I am a firm believer in options, and he may want a place to stash some cash in a whole life or IUL to get a decent return on some safe money. If you could preserve basis, it would allow more potential tax free withdrawals. Tell me what you know.

 

[VolAgent]

Yes, you could do it as long as you could get the basis from the old insurance company. I remember seeing that as well on Top Gun, and I believe that was the issue often encountered, getting the basis. I doubt they will just accept, I paid X for Y months.

And as you mentioned in your post, you would need a reason. I actually wouldn't look at it so much as for an IUL, but a single premium life or annuity.

Imagine if your prospect had an annuity that had built up a lot of growth. You could 1035 the term policy AND the annuity into a new single premium annuity and have a much higher basis, and thus lower growth for taxes.

Now that is just off the top of my head, so if there are some holes in the idea, well it didn't get a lot of thought beforehand.

 

[IamChange]

I haven't heard of anything like this. IIRC you need actual cash value in the policy to 1035.

You can convert a term policy into a permanent policy at the new issue age within a certain time frame from the start of the term policy (specified in the illustration or policy documents) but not at the expiration of any term policies I've personally seen.

 

[VolAgent]

I haven't heard of anything like this. IIRC you need actual cash value in the policy to 1035.

You can convert a term policy into a permanent policy at the new issue age within a certain time frame from the start of the term policy (specified in the illustration or policy documents) but not at the expiration of any term policies I've personally seen.

I have not seen anything in the law that requires cash value. Now, you have to get the original company to send over the information and the new company to accept a 1035 with no funds, but as long as you can get that done, then the new policy would have the basis of the original policy.

 

[eersfan]

A 1035 exchange of a term contract is something I've never heard of either...not that it can't be done. Interesting concept to say the least.

 

[BeeSelective]

The 1035 term exchange is for basis in the new perm policy. If basis isn't an issue, then there in no need to do it. With a 70's year old, if it is,being bought for death benefit, it's no big deal.

 

[yelchevelle]

What Volagent is saying is what I now remember being said on the other site. I knew there was a hang up somewhere with at least one of the companies involved. I think this is kind of like a small work around or loophole that wasn't really intended by the law.

I am not trying to argumentative, but I guess I kind of partially disagree with you BeeSelective. From what little I gathered from my conversation with the prospect, he primarily wants death benefit, but he very well could want a place to park his money. I guarantee you no one has ever shown him what he can do with a max funded life contract. He is either 74 or 75 insurance age. That is kind of close to life expectancy, but he is also perfectly healthy. In 10, 15, 20 years or longer he could still be with us.

My 90 year old grandfather just passed away, and my 86 year old grandmother is worried about running out of money even though she has no debt, a fully paid for house/car, she has a pension that pays for more than all of her bills, and other accounts that tally into the high 6 digits. She still wants access to the money just in case, and she is still saving what is leftover from her monthly pension. A lot of older people that grew up in the depression or had parents that live through it always want to plan for the worst case scenario.

If he starts wanting to access that cash value later in life for whatever his reason may be, why not have more basis in the contract if you can get it. I don't think that it is worth losing sleep over if you cannot, but if you could have one contract with a higher basis amount and one with a lower with everything else being the same, why wouldn't you take it. I don't disagree with you at all if all he wants is death benefit. At that point you gladly set him up with the 1300-2000 monthly GUL premium. Heck, I wouldn't even muddy the waters and suggest this to him unless I know that it will work and he is already planning on a max funded type plan.

When it comes time for putting ink to paper, and I give him the option of a GUL vs some type of WL or IUL that is severely front loaded with excess premiums, the term basis might just be icing on the cake that has no cost involved with it. I guess the other thing with this is that maybe it ends up not being a good fit for this case, but maybe somebody runs across the same thing in the future on a younger client. It is still good to know if it can be done.

 

[scagnt83]

The only issue at hand is basis. BeeSelective is correct, if DB is the only goal then it's irrelevant. If CV is the goal then it can be useful.

I have no clue how many carriers will accept it from another carrier, not many if I had to guess. You mostly see this on Term Conversions within the same carrier (usually a mutual carrier). They will allow the term premiums be considered Basis. Ive never seen it done outside of the same carrier. Doesnt mean that its not allowed though.

 

[walthamny]

And if you could not find a carrier that would accept a 1035 exchange to change the cost basis, you could always run a spreadsheet if and when the insurance company issues a 1099 in the future you can file the return with an explanation and back up. I have done this several times when I used to file tax returns in the family office business. You can have a alternative cost basis then what the insurance company 1099 says. You should have to be able to explain it and have some documentation.