In last blogpost, we discussed the reasons for exchanging life insurance policies to annuities. Now we will take a look at a case study.
Life Insurance to Annuity Exchange
Exchanging a life insurance policy for a NQ annuity is a permitted nontaxable exchange, provided the:
A Case Study: Joan Jumps from Life Insurance to Annuity
Joan, age 55, owns a permanent life insurance policy. It’s underperformed her expectations. She’s considered her reasons for ownership carefully and decided she no longer needs it.
Her situation:
If Joan desires income now, she could exchange the life policy for a single premium immediate annuity (SPIA). She would buy the SPIA with a $115,000 premium (the life policy’s cash value) and the SPIA would have a $160,000 cost basis. She would have an exclusion ratio of 100% and, provided she lives that long, would receive her payments tax-free for nearly 30 years (29.6 to be exact, representing her remaining life expectancy). Payments received after that point will be fully includible in her taxable income. In year 23 Joan would recover the total premium paid.
If Joan prefers income later, she could exchange the life insurance policy for a deferred annuity.
Finally, Joan can also add additional funds from her savings. By doing so, she’ll increase the monthly amount of protected lifetime income she’ll receive from the immediate or deferred annuity. Any additional premium would also be recovered tax-free from the annuity payouts.
Life Insurance to Annuity Exchange
Exchanging a life insurance policy for a NQ annuity is a permitted nontaxable exchange, provided the:
- Owner of both contracts is the same, and
- Annuitant on the new annuity contract is the same as the insured on the old life insurance policy
A Case Study: Joan Jumps from Life Insurance to Annuity
Joan, age 55, owns a permanent life insurance policy. It’s underperformed her expectations. She’s considered her reasons for ownership carefully and decided she no longer needs it.
Her situation:
- She’s paid total premiums of $160,000 ($16,000 annually for 10 years). That’s the policy’s cost basis. But the policy’s cash value is only $115,000.
- If she surrenders the policy, Joan receives no tax benefit from having paid more for the policy than it was worth at the time of surrender.
- If Joan executes a 1035 exchange of the $115,000 cash value into a NQ annuity, her cost basis of $160,000 can be recovered tax-free from the annuity payout.
If Joan desires income now, she could exchange the life policy for a single premium immediate annuity (SPIA). She would buy the SPIA with a $115,000 premium (the life policy’s cash value) and the SPIA would have a $160,000 cost basis. She would have an exclusion ratio of 100% and, provided she lives that long, would receive her payments tax-free for nearly 30 years (29.6 to be exact, representing her remaining life expectancy). Payments received after that point will be fully includible in her taxable income. In year 23 Joan would recover the total premium paid.
If Joan prefers income later, she could exchange the life insurance policy for a deferred annuity.
Finally, Joan can also add additional funds from her savings. By doing so, she’ll increase the monthly amount of protected lifetime income she’ll receive from the immediate or deferred annuity. Any additional premium would also be recovered tax-free from the annuity payouts.
RSS Feed
