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I applied for a life insurance policy or an annuity contract many years ago. Compared with the current insurance types and products, I feel that it is relatively old, or that the protection function is not comprehensive enough, and the cash value growth strategy is too small. In this case, can I consider product conversion or Trade in upgrade? ?If you do this, how can you avoid tax?What are the possible risks?American Life InsuranceGuide net insurGuru©️Knowledge Academy, Invited the American life insurance columnist Heather xiong, To explain this issue in detail.
What is 1035 conversion?
according toAmerican Life InsuranceAccording to the latest data from the American Council of Life Insurers in 2017, the total face value of personal life insurance owned by Americans is $12 trillion.
For various reasons, these insurance policy or contract holders may find that the life insurance policy or annuity contract they are currently holding does not meet the goal of realizing their actual needs.For example, a new life situation occurs, but the existing contract guarantees are not covered; or a new product appears to provide better services that meet consumer needs.Therefore, policyholders may want to convert existing products to other products while avoiding tax issues.
At this time, Article 1035 of the IRS Tax Law played a major role.The 1035 Exchange conversion clause provides consumers with a tax-free, legal way to exchange (rollover) life insurance policies or annuity contracts with cash value.When the product is converted, the insurance policy or annuity will not be deemed to be sold.
The operation of 1035 conversion is sometimes referred to as "Policy first aid(Policy Rescue)".
It’s important to note that only when it comes toContract holder with the same name和Conversion of similar contract productsWhen the 1035 conversion clause can be used.
The following three types of policy or contract conversion methods are tax-free operations recognized by the IRS:
- The old life insurance policy shall be converted through 1035 and replaced with a new life insurance policy;
- The old annuity contract is converted through 1035 and replaced with a new annuity contract;
- The old life insurance policy is converted through 1035 and replaced with a new annuity contract;
Consumers cannot convert an annuity contract through 1035 and replace it with a new life insurance contract.
Trading In Old Policy or Contract
The specific operation of 1035 conversion is like a "Trade In".Under certain conditions, the 1035 conversion operation allows the policy or contract holder to flexibly “trade-in” an old policy or contract and update it into an updated policy or contract.The new insurance policy and contract may have the same premium but more protection; or have a higher sum assured or better benefits.
1035 conversion involves a series of tax regulations and industry processes.Financial consultants or insurance brokers may need to provide insurance companies with a statement proving that the new life insurance policy or annuity contract is better than the old contract (to protect consumers, annuity contracts have stricter regulations), which can only be implemented after approval Rollover between different insurance companies.
Common scenarios for 1035 conversion
American life insurance industryInsurance productsIt is also being upgraded, and the needs of consumers are becoming more and more diversified.
Consumers' demand for conversion and renewal of life insurance policies or annuity contracts has arisen.In this case, the IRS promoted the birth of the 1035 Exchange conversion clause.
The following two situations are the main scenarios for consumers to perform 1035 conversion:
- Long-term care protection is required.According to the introduction of the American Association for Long-Term Care Insurance in 2018, when the insured is older or affected by illness, long-term care is required, but the insurance policy or contract he holds It is an old product and does not provide similar protection.The 1035 conversion can be used for life insurance policies, MEC policy contracts whose cash value exceeds the upper limit set by the IRS, or annuity contracts, so that these types of products can be converted into long-term care protection contracts.This means that old life insurance policy contracts can provide protection for long-term care.
- In the same contract, better new products appear.When an insurance policy or contract product that can better meet customer needs appears on the market, policyholders can choose to consider the old products they hold based on their own health conditions, insurance policy policies and other factors, and update them through the 1035 conversion clause. For new insurance policies or contract products, so as to obtain more protection.
Disadvantages of 1035 conversion
Surrender charge, Surrender ChargeIt is a risk that consumers should pay attention to.
According to the SEC in 2018, if your insurance policy or contract is in the Surrender Charge Period (Surrender Charge Period), when the 1035 conversion is performed, according to the agreement between you and the old insurance company, you You may be required to pay the cost of surrendering the insurance.In the new policy or contract, there will also be a new Surrender Charge schedule-the surrender charge cycle of the new policy or contract may be longer than the remaining surrender penalty period of the old policy or contract.
Column summary
In the process of actual communication with customers, even after comparing the advantages and disadvantages, policyholders will face the difficulty of making choices.Due to the increasing age of policyholders, the cost of a new policy may be higher than before, but policyholders often forget to consider the time cost as an important factor.When consumers can accept the cost of 1035 conversion, and the new contract does provide new return strategies and guarantees, and provides consumers with the required functions and tax benefits, it is reasonable to perform 1035 conversion.It needs to be emphasized that there are also relevant guidelines in each state,It is not recommended to recommend 1035 conversion to the elderly.Before performing 1035 conversion, be sure to consult and seek help from professional related personnel.
(American Life Insurance Guide insurGuru©️Knowledge Column ©️Heather xiong Authorized use)
