Life Insurance Annuity: Combine Your Policy | Trusted Choice

Life Insurance Annuity

Can I Combine a Life Insurance Policy with an Annuity?

(If so, where do I start?)

Carey Gregory | September 5, 2019
life insurance annuity

Can I Use a Life Insurance Policy as an Annuity?

In a word, no, but there are ways to convert an insurance policy that has accumulated cash value into an annuity. If you were to simply cash out the policy and buy an annuity with the proceeds, the cash you receive that exceeds the premiums you paid would be taxed as income. 

However, a section of the tax code known as a 1035 Exchange allows policyholders to transfer funds from an insurance policy to an annuity without paying taxes.

Doing a 1035 Exchange rather than surrendering the policy is particularly helpful to people who’ve accumulated cash value in a life insurance policy but find that it no longer fits their needs. 

This is a common situation for retirees who find themselves in different circumstances than when they bought the policy and had a young family to protect.

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What Do I Need to Consider?

  • The death benefit: The first thing to consider is that you’ll be giving up the death benefit of the insurance policy. Even if you’re no longer working, remember that when one spouse dies, the surviving spouse will receive lower social security benefits and possibly lose other retirement income from things like pensions.
  • Guaranteed income: In exchange for giving up the death benefit, you’ll gain a guaranteed income for life (or a specific number of years). You can add other options to the annuity as described below. Note that you’ll also no longer be paying the premium on the life insurance policy so your expenses will go down.
  • Insurance coverage: Although you’ll lose the death benefit of the insurance policy, many annuities offer optional riders that provide a death benefit that allows a spouse to continue receiving payments if the owner dies, or even to accelerate payments if the owner is diagnosed with a terminal illness. You can also add a joint option which will continue the annuity payments until both spouses die. And, of course, you could use part of the annuity payments to pay the premiums on a term life insurance policy which are generally less expensive than whole life policies.
  • Long-term care: Section 1035 also allows you to exchange your life insurance policy for a long-term care policy tax-free. And since long-term care benefits aren’t taxable, you will never pay taxes on your gains if you did this. However, there are few long-term care insurers that allow you to pay for coverage with a lump sum. That means you would have to arrange a partial exchange every year to pay the annual premiums, and there are only a handful of companies that handle partial exchanges. The better solution would usually be to choose an annuity that includes a long-term care option.
  • Taxes: Although a 1035 Exchange is tax-free, you will pay taxes on a proportion of your annuity payments based on the gains you earned on the life insurance.

How Do I Go About a 1035 Exchange?

Although the company that provides your life insurance will almost certainly be able to handle a 1035 Exchange for you, keep in mind that they will only offer you the annuities and options they offer and at their prices. 

There can be a significant difference in costs between annuities offered by different companies, so it’s important that you compare prices and options from multiple companies. 

Annuities can be complex, and comparing them isn’t simple. So this would be an important time to enlist the services of an independent agent who can do the comparisons for you and offer you a range of choices at the best prices available.

Our vast network of independent insurance agents can provide you with a large selection of annuity products and guide you through the exchange process. This is a benefit you won’t get from a single insurance company or investment firm.

Why Choose an Independent Insurance Agent?

Independent insurance agents simplify the process of shopping for and comparing annuities and handling the 1035 Exchange process. They will explain the complex terms for you, cut through the jargon, and make sure you understand the fine print.

But perhaps most importantly, they work for you — not just one insurance company. They can compare annuity products from many companies and pick the ones that are best for you at the best possible price.

They’ll also be there for you in the future if your needs change or questions arise. They work for you, and their only job is keeping you satisfied now and in the future.

Looking For More Information?

If you’re considering an annuity, our independent insurance agents have a large library of additional information to help guide your decisions.

Sources © 2020, Consumer Agent Portal, LLC. All rights reserved.

https://www.investopedia.com/terms/s/sec1035ex.asp

https://www.investopedia.com/ask/answers/09/1035-exchange.asp

https://www.finra.org/investors/1035-exchanges

https://www.irs.gov/pub/irs-drop/n-03-51.pdf

© 2020, Consumer Agent Portal, LLC. All rights reserved.

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