Now we will turn attention to how to exchange a permanent life policy to another product.
1. Exchange to an Income Annuity
IRS allows you to do a 1035 exchange by converting your life insurance into an income annuity without paying tax on your gains.
The benefit of this exchange is that you will no longer have to pay premium, instead, you will lock in lifetime income. The conversion is tax free, but you will have to pay tax for portion of the annuity payment that exceeds your cost basis.
There are many annuity products, your goal is to find the one that offers the largest payout. Find an independent agent to help you shop around.
2. Exchange to a Long Term Care insurance
Because long term care benefits aren't taxable, you will never have to pay taxes on your gains, this is a key advantage for this exchange.
However, no long term care insurance allows you to pay for coverage with a lump sum payment, so you have to arrange a partial exchange every year to pay the annual long term care insurance premium, and few long term care insurers support partial exchanges.
3. Exchange to a Combo of Life Insurance and Long Term Care Insurance
Lincoln Financial's Money Guard is an example, it has a pool of funds that can be used for both long term care or death benefit. If you have a healthy retirement life and never needs long term care, you will have a death benefit that can be passed to heirs, otherwise, you can use the long term care benefits by yourself.
4. Exchange to a Life Insurance with long term care rider
There are plenty of choices in this option - if you need long term care, these policies will withdraw money from the death benefit, if the death benefit fund is exhausted, the rider will kick in extending coverage to whatever determined by the policy. Since there are many choices, it's best for you to enlist an independent agent shop on your behalf.
In order for long term benefits to be effective, there are stringent requirements - you typically cannot perform at least two daily activities such as dressing, bathing, moving, etc.
In our next blog post, we will discuss the option of selling your permanent life policy.