RGR_THE INSURANCE LETTER (NEW)_ Penton Media April 21, 2009 If you want to view this on the web go to: http://enews.penton.com/enews/registeredrep/v/696 FEATURE STORY --Insured Swap Life Insurance Policies, Hold Onto Annuities By Alan Lavine Life insurance holders are opting to trade in their old policies for new, better designed or more conservative policies issued by companies in solid financial health these days. But they're holding on to their variable annuity contracts, as buying new ones in the midst of a big equity market decline might result in a decline in principal. Plus issuers are raising fees and cutting back on benefits. Indeed, tax-free 1035 exchanges of life insurance policies are rising, while the pace of 1035 exchanges for variable annuities has slowed. Data is hard to come by, but industry experts estimate that over 15 percent of all life insurance sales are due to exchanges, up from 12 percent ten years ago. The 1035 exchanges are particularly popular for universal life insurance with death benefit guarantees, says Howard Drescher, spokesperson for LIMRA. Meanwhile, 40 percent of variable annuity sales were triggered by 1035 exchanges in 2008, down from 50 percent in 2005, says Frank O'Connor, manager of Morningstar's Variable Annuity Research and Data Service, in Chicago. To initiate a tax-free 1035 exchange, named for Section 1035 of The Internal Revenue Code, appropriate 1035 exchange forms must be completed by the agent and client. (The new policy is not tax-free if the policyholder cashes out his insurance policy or annuity and then purchases a new one.) Under the IRS rule, tax-free exchanges are permitted when a policy holder wants to switch one life insurance policy for another life insurance policy or an annuity, or when the holder wants to exchange one annuity for another. Annuities cannot be exchanged for life insurance tax-free. Get a Life Life insurance holders seem to think now is a good time to get a better deal, says Howard Drescher, spokesperson for LIMRA, Windsor, Conn. For starters, many policyholders and their advisors are worried about the financial health of the life insurance companies issuing their policies. A.M. Best, Standard & Poor's Moody's and Fitch have downgraded the ratings on many insurance companies in the past year. Some life insurance policy holders are also opting for policies with no-lapse guarantees, says Drescher, whose research and consulting company is compiling data on 1035 life insurance policy exchanges. With universal life insurance, policyholders can vary premium payments. They earn a variable interest rate, typically re-set annually by the insurance company, on the cash value portion of their policy. A no-lapse policy prevents the policy from terminating if the cash value build-up fails to cover the cost of the insurance. "People that are still in good health but are in a poorly designed policy may benefit from a 1035 exchange, Whitt says. "The older policy may be too expensive while there is not enough cash value build-up." Whitt adds that exchanges often involve poor performing Universal Life Insurance and Universal Variable Life Insurance Polices purchased in the 1980s and 1990s. In the 1980s, for example, people purchased universal policies based on illustrations using high interest rates. Now that interest rates are dramatically lower, cash values are minimal, and premiums may not cover the insurance cost. Variable universal life policyholders have also been hit by stock market declines this year and are turning to conservative whole life insurance or term insurance, Whitt adds. Others are switching from older whole life insurance policies with high premiums into lower premium universal coverage for extra savings. A 65 year-old policyholder who needs extra income could save nearly $200 monthly on $300,000 of coverage by exchanging a whole life policy for a new universal policy. To read the rest of the story, click here To view the full article go to: http://registeredrep.com/newsletters/insuranceletter/insured_swap_life_insurance_annuities_stick0421/ Advertisement ---------------------------------------- In a flat or declining market, The Nationwide Lifetime Income Rider(R) comes through for your clients with the highest guaranteed income among competitors. Call 877-996-3669 and enter code 56210 for an illustration or more information. http://ad.doubleclick.net/jump/N2614.RegisteredRep/B3329188.5;sz=300x250;ord=04212009? ---------------------------------------- Most Popular Stories ---------------------------------------- *The Jewish Clause: Putting conditions on an inheritance into a will. 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