Americans have individual life insurance with a total face value of $12 trillion according to the recent survey of American Life Insurers. However, there are instances wherein policyholders no longer need either life insurance or annuity.
Given the scenario today that more Americans are living longer and will more likely require long-term care, some policyholders are thinking of trading their old contracts or policies to a standalone long-term care insurance.
Is it possible to trade your life insurance or annuity to ALTCP long-term care insurance?
You’re in luck because you can do this through 1035 exchange – tax-free.
What is a 1035 Exchange?
Section 1035 of the Internal Revenue Code also known as 1035 exchange is a process of repurposing your old life insurance or annuity to long-term care insurance.
This is one of the most beneficial planning strategies but is often left unexplored. People in their 50s, 60s or even 70s should take advantage of this if they want to protect their assets from the rising cost of long term care.
Benefits of 1035 Exchange
The purpose of 1035 exchange is to avoid paying for tax when you sell your life insurance or annuity. Through this tax code, you can take advantage of exchanging policies or contracts to long-term care insurance without paying tax for the gains of that sale.
Aside from life insurance and annuity, there are other policy or contract that are permitted for exchanges to traditional long-term care insurance.
However, you need to meet certain requirements first before you can proceed in trading your old policy or contract. In case you’re eligible for 1035 exchange, there’s a chance that your new policy or contract may have lower costs.
Also, take note that not all long-term care insurance companies accommodate 1035 exchanges. We highly recommend you to contact ALTCP or your insurance provider who can help you answer your queries whether your insurer accepts 1035 exchange – for free.
1035 Exchange Rules
Here are the three requirements of the IRS or 1035 exchange rules that should be followed to make the policy or contract exchange tax-free.
- Internal Revenue Code 1035 requires that the owner(s) of both policies and contracts are the same.
- You don’t take direct possession of the money that is being transferred. Your cash value must be directly transferred from one insurance company to the other to be considered a tax-free exchange.
- The new life insurance’s face amount is equal to or greater than your existing policy.
Who Would Benefit From a 1035 Exchange?
There are several reasons why people repurpose their life insurance or annuity and these are the most common situations.
1. Policy that is Performing Poorly
If you have an adjustable life insurance or older flexible premiums that are not performing, you’re not alone in this. As your interest rates fall, the investment returns of insurance providers couldn’t keep up with the premium projections. Policyholders are getting notices that the cash value of their policies are going down, which increases their premiums and causes policies to lapse.
Good thing, you can rescue your policy to its demise through 1035 exchange. Taking advantage of 1035 exchange allows you to transfer existing cash values from a policy that is performing poorly for a low guaranteed premium.
2. Insurance Company is in Financial Trouble
If your insurance company is experiencing financial troubles, this might be your way out and consider a safer option than risk losing a significant amount of cash value with that company.
Check out reviews and ratings of your insurer to find out if you’re still in good hands and your insurer is still capable of paying for claims.
3. At Risk of Needing Long-Term Care
Qualifying for a 1035 exchange from an annuity to life insurance to long-term care insurance makes sense for certain scenarios. If your adult children are financially independent and you have enough savings, you may no longer need your life insurance as much as you need it when you purchased it.
Your need for a policy or contract may have changed now and repurposing it to a standalone long-term care insurance seems more fitting considering that 70% of Americans 65 and above will need some form of long-term care. Another factor to consider exchanging to a long-term care policy is the rising cost of long-term care.
What is Long-Term Care?
Long-term care is defined as the support and services an individual might need to carry out their Activities of Daily Living (ADLs) such as eating, bathing, dressing and toileting in the event of disability, illness and sudden impairment. This type of care can be administered at home or in long-term care facilities such as nursing home, assisted living facility or CCRC.
Cost of Long-Term Care Today
According to ALTCP cost of long-term care, here are the annual median rates of long-term care services today.
Who Shouldn’t Make a 1035 Exchange
1. Poor Health
It may not be a wise move to do a 1035 exchange to traditional long-term care insurance if you’re health has declined since you purchased your life insurance or annuity. This will only result in higher premiums for your replacement policy.
The price of your old policy and annuity was probably based on your age the time you purchased the product, which means they might pay more and get less after the exchange. So make sure that a 1035 exchange to long-term care insurance policy serves your interest.
2. Outstanding Loans
Life insurance policyholders with an outstanding balance should take note that a 1035 exchange could trigger taxes on your unpaid balance.
With longevity on the rise, long-term care has become a potential expense for the American aging population. If you want to protect your assets from the high nursing home costs or assisted living facilities costs in the future, and your need for annuity or life insurance policy has changed, a 1035 exchange to long-term care insurance is something you should consider.