What You Need to Know
- The wrong life insurance or annuity policy can not only be expensive but also leave some clients inadequately prepared.
- Annuity contract holders can avoid ordinary income taxes if they find one with better terms or are about to end their guaranteed term.
- Annuities held in a qualified account, such as an IRA, are ineligible for a 1035 exchange, since they’re not taxable.
The right life insurance coverage or annuity policy is key to achieving financial security, but the wrong policy can not only be expensive but also can leave some clients inadequately prepared.
There are several reasons that a client might own a suboptimal life insurance or annuity policy, including poor advice from a previous advisor or a change in their life circumstances. Changes in life insurance and annuity products, fluctuations in interest rates, and market performance can also prompt a reevaluation of whether an older policy best suits the policyholder’s needs or whether they should look at products from other life insurers.
In those instances, the client may want to sell or surrender their policy to upgrade to a new one. Such a move, however, may have income tax implications. The tax hit will depend on the income tax brackets of the policyholders. In some instances, you can help a client avoid such tax issues by using a 1035 exchange under the Internal Revenue Code.
Here’s what you need to know about 1035 exchange rules.