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
|
