06/08/2020
1. Possible Exchanges Where the Contract Owner is the Same Before and After the ExchangeLife insurance can be exchanged for life insurance
Life insurance can be exchanged for an annuity. This includes exchanges to either a deferred annuity or a single premium immediate annuity (SPIA)
A deferred annuity can be exchanged for another annuity. This includes exchanges to either another deferred annuity or a SPIA
An annuity CANNOT be exchanged for life insurance.
2. Types of Contracts that Can Be Exchanged with the Same Insured or AnnuitantSingle life to single life
Single life to single annuitant
Survivorship life to survivorship life
Survivorship life (one insured deceased) to single life
Single annuitant to single annuitant following exchanges DO NOT relate to the same insured(s), so will NOT achieve a tax-free transfer:
Single annuitant to joint annuitant
Single annuitant to single annuitant
3. Exchange of Life Insurance Policies with Loans
You must be careful when exchanging policies with loans that are in a gain position. A policy is in a gain position if the total cash value is greater than the adjusted cost basis.If the loan is extinguished (discharged) on the exchange, the lesser of the loan or the gain in the policy will be taxable income to the policy owner. This will generate a Form 1099-R from the carrier.
If the loan is carried over on the exchange to the new carrier, the exchange will be accomplished tax-free. However, the new policy will be issued with an outstanding loan right from the start. Many carriers have loan to value limits that must be met before they will accept a Section 1035 carryover loan.
4. Multiple Contract Exchanges
Multiple policies with the same owner and the same insured can be exchanged for a new policy. And one policy can be exchanged for multiple new policies. The cost basis of the contracts will be carried over to the new carrier and adjusted cumulatively (i.e. 2 for 1; 3 for 1) or proportionally (i.e. 1 for 2; 1 for 3) as the case may be.5. Important Administrative Issues
Finally, be careful with the paperwork to complete a Section 1035 exchange. Carriers want the ownership to match exactly between the Section 1035 exchange form of the new carrier and the actual owner(s) of record with the old carrier. Otherwise, the old carrier may not process the exchange until the “title” ownership matches exactly. This is especially important when existing policies owned by an Irrevocable Life Insurance Trust (ILIT) are being exchanged. Also, if a different policy owner is desired for the new policy, a change of ownership form must be executed. This change of ownership could take place either before or after the exchange depending on the specific facts of each case. Contact INTEGRITY ANNUITY ADVISORS when considering a Section 1035 exchange from one carrier to another carrier. Integrity Annuity Advisors will work with You & Your Current Annuity Company to assure that the transfer of funds is handled in an expedited manner.
