In today's video
we are going to talk about
1035 exchanges.
What is a 1035 exchange?
How does it work?
Does it make sense for you
if you have a high cash value
life insurance policy?
Let's get on into it and have some fun
talking about cash value life insurance.
So first and foremost
what is a 1035 exchange?
A 1035 exchange
is a transfer of cash value
from one life insurance policy
to another life insurance policy
the transfer is a tax-free exchange
so for example
if I have $100,000 in cash value
with a company A
I've got a policy with them
and I like a different company
with a different product
I say you know what
I'm not happy with my old policy
I'd like to transfer it over
the definition of this
would be a 1035 exchange
I'm transferring the cash value over
and that transaction is tax-free.
Now if the existing policy is a MEC already
a modified endowment contract
when I transfer that over
the new policy will be a MEC
so that question sometimes comes up
can I get out of a MEC
by just transferring that MEC policy
to a non-MEC policy?
The answer is no unfortunately.
A 1035 exchange
works when it is a life insurance policy
to a new life insurance policy
a 1035 exchange can also be executed
if I have a life insurance policy
and I'm transferring the cash value
to an annuity
we don't do that a whole lot
with our practice
but it is possible
in some cases it does make sense
but it is possible
and that will be a tax-free transfer.
So tax-free or 1035 exchange
is a tax-free transfer of cash value
from one policy to another policy.
Does it make sense for you?
This is the big question
and the answer is maybe
really what has to be done
whenever a 1035 exchange is on the table
if you're considering it
an analysis has to be done
and it has to go beyond
just looking at here's my policy currently
and here's what it looks like
if I transfer it into a new policy
because I can almost always make a case
from an illustrative standpoint
meaning I can show you an illustration
and say hey you've got a lot more money
with this new option
especially long term.
But the thing
is when I look at projections
it's easy to make sense of it that way
to say hey we can upgrade your policy
let's transfer it to a new one
but reality tells a much
much different story
you have to take several steps
really as the agent
if you're a consumer
so if you're working with someone
and you're considering a 1035 exchange
knowing what questions to ask
what to look for
will really really help you with this.
When people reach out to us
about 1035 exchanges
when people have reached out to me
I will kind of slow them down
and say hey let's look at the policy first
I need a lot of information first
to make sure that this is actually
in your best interest
because if it's not
I'm going to tell you that it's not.
There's been times
people have had 7 figures
a lot of cash value
in a number of policies
one case I recall
was about $2,000,000 he had
in 3 different policies
and they were several years old
they were with a smaller mutual company
not one of the major mutuals
we looked at it or I looked at it and said
it doesn't make sense
those policies are too old
you've got a higher guaranteed rate at 4%
the new products don't offer that
we looked at the design
of the existing policies
like it doesn't make sense
and that was my recommendation
not to do it.
Now I could have made a case
by looking at some new illustrations
to say hey look at these values over here
and try and manipulate the software
to make it look better
that's not right in my opinion.
So points to consider here
old policy
what insurance company is it with
and how was the policy designed?
Company selection
policy design
is typically what I look at.
New policy
company selection
and policy design
the design is very very important here
and you're going to see this
not so much in this video
but the next couple of videos
when you look at different case studies
you'll see where the design is so important.
I want to add something here too
when it comes to company selection
I'll frequently talk about
the 4 major mutual companies
having consistently delivered
the strongest actual cash values
to policyholders
real performance
not just good-looking projections
does that mean
if you have a policy with a small company
oh man I found out that
I could potentially have more money
with a different company
I should just 1035 exchange it?
No, not at all
similar to the story that I shared earlier
if you've got a policy
and it's beyond the 1st 2 years
meaning it's more than 2 years old
and especially if it was well designed
a lot of times it doesn't make sense
to 1035 exchange it
especially if you can make changes
with that existing policy.
A lot of times people are not aware of this
in our next video
we're going to look at a case
where we actually
examined a number of changes first
what can we do to improve
the existing policy
creating that I didn't know I could change
the death benefit and premium
on my existing policy
therefore not have to go through
new expenses with a new policy
so it's good just to know
what steps can I take
with an existing company
with an existing policy
before just abandoning ship
which would be a 1035 exchange.
So to get back on track here
we want to look at the old policy
company selection
policy design
the new policy as well
compare them side by side
look at the guarantees
this is what no one wants to show
look at the guarantees
because what you'll see very often
when these cases occur
when it's easy to say
hey 1035 exchange makes sense
because you'll have more money long term
you might see that
on the non-guaranteed side
of an illustration
meaning
when I compare the new and the old
the new one with a 1035 exchange
looks better
but then the guarantees tell the opposite
it's not even close
then we want to look
at actual performance too
my point here is
this will give you a nice
worst-case scenario to be aware of
and if you get resistance
someone doesn't want to show it
pry, make sure you continue to ask
because it is your money going into a policy
we do not want to
find out that reality was different
than what we saw
and now we're like great
like it didn't make sense
and I lost more money as a result
trying to fix a problem I thought I had
but after the fact
I realized it wasn't a problem
I got myself into a worse situation.
Look at the guarantees
we're going to look at that
very intensely in our next video
and we'll take it a couple steps further.
A 1035 exchange
you can transfer cash value
from an existing whole life insurance policy
to a new whole life policy
to an IUL
to a VUL
any cash value life insurance product
you can transfer the cash value
from the old policy to a new policy.
What's very important
to be aware of here though
is if we have a universal life policy
say it's an IUL
and it has surrender fees attached
let's say you're 5 years into it
you're looking at it
you say hey it doesn't make sense
I want a 1035 exchange it
maybe the numbers even make sense
the surrender value is what's transferred
not the accumulation value
so often if I'm in a policy
that has surrender fees
which you typically will never see
with whole life
it'll typically be with universal life products
if it's got a surrender fee attached to it
it's usually the surrender value
that gets transferred
so I'm locked in until that surrender fee
has expired or if I just want to eat it
which that's hard to do
like I don't like doing that
unless you can actually justify it
with numbers and data
but you can transfer cash value
from any life insurance product
to another cashflow life insurance product.
Another reason
or another point to consider
and why some people are attracted
to 1035 exchanging
an existing policy to another company
often has to do with PUA flexibility.
If I have a policy where I'm paying in
let's call it $100,000 per year
every single year and it's a bill
and then I find out I can have a policy where
I can pay the same $100,000 in
but I'm only committed to $10,000
I can commit to the $10,000
and I can pay $100,000 each year
or I can pay just the $10,000
and add more funds at my discretion
a lot of people
particularly business owners
real estate investors
or people that see their cash flow fluctuate
are really attracted to that type of design
and they usually end up
max funding the policy
but it's at their discretion
instead of receiving a bill for it each year
so learning more, call it rules
what's available and what's not available
with different insurance companies
around that PUA Rider
can sometimes add some
additional benefits
or reason as to why
a 1035 exchange will make sense
that's more of the added benefit
I still like to really focus on the numbers
because we don't want to fall for a trick here
and a trick I'm not saying an agent
is going to deliberately trick you
or anything like that
a lot of times it's just digging deeper
by looking at the guaranteed values
actual performance
real data, all that stuff.
So what to ask for as a policyholder
if you're looking at a 1035 exchange?
So you want to ask your agent this
or your agent wants to be asking
these questions for you
providing that awareness
current values
which if you're looking
at a whole life insurance product
is based on the company's
present dividend rate
it's good to look at
both with the old policy
and a new policy
look at the two side by side.
Next guaranteed values
both with the old product
and the new product
now sometimes you'll have to take
extra steps here
because the guaranteed values
if I take the tabular details
or tabular values
of a life insurance illustration
that will show guaranteed values
but they're not accurate
if I've got a term Rider
it often assumes it's never cut
it assumes
I make premium payments forever
with some companies
is how the tabular values work
so I want to make sure I have the true
custom guaranteed values
meaning if you said
I want to pay into this for 10 years
and the new policy
I want to pay into for 10 years
maybe I've already made 2 payments
with the existing one
so show me fulfilling my payments
for 10 years
compared to a new policy
where I pay the same dollar amount in
but only for 8 years with the transfer
it doesn't make sense
when I look at everything side by side
based on the guarantees
that's what we want to look at
and that's what we will look at
in the next video
we'll have a lot of fun with that.
On that or similar to that point
looking at the break-even point carefully
so when I say carefully
what we want to do is see
what is the break-even point
with a new policy
or we're looking at a 1035 exchange
and then also what's the break-even point
if we factor in the payments
we've made to that old policy?
Because I already dished money out
and if I'm looking at a 1035 exchange
if it's before the break-even
of the existing policy I have
if it's not a very old policy
I'm going to take a hit there upfront
so I want to see
what's my true out of pocket
just collectively that's been paid
into life insurance policies
transparency if you want to call it that
there we go
transparency can help make
an informed decision
and prevent buyer's remorse
very important here.
So what we're going to look at
in the next 2 videos are unique cases
but everyone has a unique situation
what we'll look at first
is a couple in their early 40s
who have a whole life insurance product
with one of the major mutual companies
we're gonna touch on the design
with that old product
and then what they're considering
with the new product
this was actually a case
where we took our time
and as we compared to the 1035 exchange
as of the day of shooting this video
we're still comparing it
we have not made the decision
to execute yet
and the reason why
is we want to exhaust all options
with the existing policy
we're saying hey if we keep it
but reduce our premium
increase our premium
restructure the design
because the company they have
will allow that
can we salvage what we've paid in
and see more monetary value
with the existing policy
before the 1035 exchange?
A lot of nitty-gritty stuff
you'll see it in the next video
which one gives me more money
it'll simplify things.
So that one was a lot of fun
just digging into everything
and it was helping the couple
make the best decision
and then the second case
will be a male in their mid-50s
who started a policy 25 years ago
I think was a little bit
longer than that actually
and it was a VUL
variable universal life insurance policy
now he's older in his 50s
so he's gotten older
what happens with universal life policies
as we grow older the expenses go up
however every case is unique
with that particular case
he's got a fixed account available at 4%
and we're going to look at the guarantees
along with the guaranteed
maximum expenses
and see does it really make sense for you
based on what you're trying to do
even though it's a universal
life insurance policy
so the analysis
is what is very very important here
it helps remove emotion from the decision
because typically speaking personally
when I make emotional decisions
sometimes
when I have not looked at the data
that's where buyer's remorse comes in
not all the time
if I trust the person that I'm working with
and they treat the situation
the same way I would be treated
like I can trust them
they're not going to do anything
or overlook something
then it usually works out well
but that's me just talking about business
and decision-making process in general.
I hope this video was informative
regarding 1035 exchanges
if you enjoyed it
please hit the like button
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leave any questions in the comments below
if you'd like to see
any particular case studies
and I hope this helps.
Thanks so much.
Hey guys Steve Parisi here
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