Are Your Clients’ Life Insurance Needs Changing?

Did you know your clients can use a cash value life insurance policy as the source of funds for a new fixed annuity? Sometimes, a life insurance policy underperforms due to wrong assumptions or changes in a client’s situation. In certain cases, a fixed index annuity that offers liquidity and the chance for steady returns might be a suitable choice. 

Clients have the ability to exchange a life insurance policy for an annuity without triggering any taxable gain or loss. This is known as a 1035 exchange. The policy’s cost basis — the total premiums paid minus any distributions or withdrawals, excluding loans — transfers to the annuity. If the cost basis is higher than the current cash value, it stays protected. This may give your clients the flexibility to meet their changing financial needs. 

Here’s a case study using an insurance policy’s cash value to move into a FIA with an added death benefit.

The Concern: A 72-year-old man owns a variable universal life policy. The cash value in his policy is falling while the insurance costs are rising. Even though his beneficiary would receive a $150,000 tax-free death benefit in the event of his death, his financial situation has changed. He now needs more liquidity, income potential, fixed growth, and preservation of his funds, which outweighs his past need of a future tax-free payout for his beneficiary. 

Possible Solution:¹ The client chooses to transfer his cash surrender value using a 1035 exchange into The Standard’s Enhanced Choice Index Plus annuity with Legacy Max Enhanced Death Benefit Rider. 

He divides his funds evenly between a Fixed Account and an S&P 500^® Daily Risk Control 5% ER Index option, which also comes with a guaranteed participation rate. His spouse remains protected by the death benefit and can take over the annuity upon his death. Furthermore, the annuity’s value will increase to the death benefit amount if he passes away. By maintaining a high-cost basis, more of the client’s future withdrawals are treated as a return of his original investment rather than taxable earnings, which reduces his overall tax bill.

Variable Universal Life Policy:
$75,000 Cash Surrender Value
$81,000 Cost Basis
$150,000 Death Benefit

The Standard’s Enhanced Choice Index Plus 5 with Legacy Max:
$75,000 Transfer Amount
$81,000 Cost Basis
$120,788 Year 5 Illustrated Death Benefit²

Ready to Turn Challenges Into Opportunities?

Using an insurance policy’s cash value to fund a fixed index annuity is a financial strategy that may benefit certain clients. This strategy can boost your practice and redefine financial success for both you and your clients