- A 1035 exchange can often make IUL owners far more money.
In this educational episode,
I'm going to address the question,
what is a 1035 tax-free exchange
with regard to life insurance?
Get ready.
I'm gonna teach you some things
that most insurance agents don't understand.
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So I'm Doug Andrew.
I've been helping people optimize assets, minimize taxes
and empower their authentic wealth now
for nearly five decades.
And in doing that, people view me
as a financial strategist, retirement planning specialist.
And if you've watched very many
of my educational videos,
already any of the dozen books that I've been honored
to have authored thus far, you'll understand
that my favorite financial vehicle to help people
accumulate their money tax free
and then be able to access that money
totally income tax free for their business,
for working capital, for college funding.
But then at the end of the day,
most people use it for retirement
because it knocks the socks off of most IRAs and 401ks.
You only have to earn a return, like I have, averaging 11%
to net 10% cash on cash retroactive back to day one
if you structure the IUL correctly,
you fund it properly and you rebalance.
So if you don't know what I'm talking about,
you can watch some of the other episodes to understand this
but then people say, "Well,
when should I consider exchanging it for a new policy?"
Now, this is a section
of the Internal Revenue Code, section 1035,
that if you have an older life insurance policy,
and I don't want to encourage you just to drop an old policy
because sometimes you can perfect it, you can utilize it
and just change the structure a little bit
so it will perform better.
But many times when I would meet with clients
and I could see that the former insurance agent
didn't really know what they were doing
when they structured the insurance policy,
they had more death benefit than they needed.
And so I might be able to go
into the old policy and just lower down the insurance
as long as I didn't violate the TAMRA
and tweak it so that it could earn a better rate of return.
So at the end of the day, the net rate of return
was within 1% of the gross rate of return.
But sometimes I looked and I went,
we're gonna be lucky to gross eight.
And yeah, I can tweak this to net seven
because if you earned eight the way
this former agent structured it,
you're only gonna net four or five.
So I can tweak an older policy
but then if I know that there's newer IUL policies
with newer features where you could earn maybe 10 or 11,
like I have, instead of tweaking the old one to perform
at eight and net seven, it would be better to exchange it
for a new one where you can rebalance
and and earn 11 and net 10 or use some multipliers.
Or maybe the new policy has the option
for a one-year point-to-point with no cap,
which is what made many of our clients 61.33% returns
during COVID-19 from March of 2020 to March of 2021.
So maybe a new policy will have features
or index options or linking methods
or borrowing features that the old policy doesn't have.
So it may behoove you to let go of the old policy
but before you just let it go,
see, if you just let it lapse or you just cancel it
and you take your cash surrender value,
then if you actually made money in it,
you're gonna have to pay tax
on any money you get out of canceling the policy
over and above the premiums you paid into it.
You don't wanna do that.
You don't wanna trigger unnecessary tax.
So let's say the old policy that you have,
you put in, you know, $80,000 and it grew to 100,000.
It wasn't structured very well
but at least it's grown some
so it's worth 100,000 and you put in 80,000.
Well, if you just cancel it
and you pull out 100,000,
you're gonna have to pay tax on the 20,000
that it's worth over and above what you put into it.
That's called your basis.
So you don't wanna do that.
You can tax free exchange it
and avoid paying tax on the amount.
Now that's the first thing you need to understand.
So in the internal revenue code,
the IRS allows you to exchange tax free the money
in an old insurance policy,
a permanent insurance policy that has cash value
and be able to transfer it
into a new insurance policy without having to pay any tax.
The money has to go straight
from the old insurance company,
the company that has the old policy, in a 1035 exchange.
And sometimes they drag their feet
and it may take, you know, 60 days or 90 days
but it's worth it to do a 1035 exchange.
There's a form you fill out, you notify the old company
and they may try to get you to not do that
because they wanna preserve the business
but they're used to this.
People do it all the time.
And so they send a check
to the new insurance company on the form
and it is deposited into the new insurance policy,
the account number, the policy number
but it's done without you getting the money.
So if you take receipt of the money,
it's not like a 1031 exchange
on real estate where you can take receipt
of the money and you got, you know, 60 days
or 90 days to hurry and go buy another piece
of real estate and be able to get a step up in basis.
No, you have to have the insurance company
that had the older policy transfer the money
to the new policy.
So let's go back to this example.
Let's say you had a policy that you put in 80,000
and it grew to 100,000.
It has 100,000 of cash value
and you wanna get a newer, nicer,
better policy and you have some additional money.
And so you want to be able to put in another $200,000
in addition to the 100,000
of cash value that's in the old policy.
So the new IUL policy has a guideline,
single premium is what we call it, let's say of 300,000.
Well, what you can do is transfer the 100,000
of cash value under section 1035
into the new one and you hit the ground running
with 100 grand into the new policy.
But that's as far as most agents ever get to as they say,
"Oh yeah, we'll do a 1035 exchange.
Let's take the 100,000 out of the old policy,
put it in the new one
and then we'll fund the other 200,000."
But now you're subject
to the TAMRA tax citation where the 200,000
has to be spread out over let's say five years.
So 200,000 over five years, you can only put
in 40 grand a year and maybe that's okay.
Maybe that's all the money you have.
But if you have 200,000 of cash
and you wanna get it in there as soon as possible
because the faster you get it in there,
the faster it's gonna grow.
And so this is what a lot of agents don't understand.
Before you do a 1035 exchange,
if you're going to try to get the money
and the the client has the money and you wanna get it
into the new policy as soon as possible
but TAMRA won't let you,
find out what the maximum amount of room
under TEFRA and DEFRA is under the old policy,
the guideline single premium.
So that means, let's say the former policy,
you could have put in up to $200,000
in your lifetime without violating the definition
of tax-free insurance under TEFRA and DEFRA tax citations.
But you only have 100,000 in there.
Well, you can add another $100,000
to the old policy if there's room
for another 100,000 that you never used, use it.
You pay 100,000 to the old policy.
Now, there might be a a premium load on that
but that's gonna be small compared
to how much faster your money's gonna grow when you get it
over to the new policy.
Even if the new policy has a premium load.
Don't worry about the premium loads
because you put $100,000
into the old policy, now it has 200,000.
Then do the 1035 exchange. Why?
Because the 200,000 can go into the new policy
and you don't have to spread that out over five payments.
The 200,000 hits the ground running.
Let's say the old policy has $300,000 of room.
You could put the whole additional 200,000 into that
and then do a 1035 of the 300,000 of the new one.
You don't even have to wait five years.
You hit the ground running
and you maximum fund the new one right off the bat.
See, it's way better to have 300,000 working for you
than to only put in 200,000 and then the last 100,000,
you can only put in 20 grand a year to comply with TAMRA.
Does this make sense?
The faster you can maximum fund it,
the better off you're gonna be
and you will make enough interest to way more
than cover the premium load of putting money
in the old policy and then the premium load
of transferring it into the new policy.
People get uptight about premium loads.
No, those will be covered pretty quick
with the interest you're earning
on maximum funding the new policy sooner than later.
So that's called a 1035 tax-free exchange.
Make sure if you're gonna do it, that you do it
with an agent who is savvy, that understands 1035 exchanges.
Don't do it with a an agent that goes,
"Oh, we'll just cancel it and transfer it over.
You may have to pay unnecessary tax
unless the cash value is less than what you put in there.
But if you're gonna put in some lump sums,
you may want to take advantage of throwing that money
into the old policy, then doing the 1035 exchange
so you don't have to spread out this new money
over five payments.
You don't have to park it somewhere
for five years while you're waiting to comply with TAMRA.
You comply with TAMRA 'cause you've already complied
under the old policy, you're grandfathered.
Does that make sense?
So I hope this has been helpful to you.
If you wanna learn more
about max funded indexed universal life
and how to do it correctly and fund it properly,
and when it's done that way, it's deemed a LASER fund.
LASER is an acronym that I've used for years that stands
for Liquid Asset Safely Earning Returns.
And so this is my 11th book.
It's been flying off of our warehouse shelves.
You can go to Amazon and buy it for 20 bucks
and you'll probably pay another 10 bucks
for shipping and handling.
And if you do that, thank you
but you don't need to do that.
I'll gift you a copy of this book free.
To claim your free copy.
You go to laserfund.com, laserfund.com or click
on the link below and you contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost
and I'll pay for the book and fire out a hard copy to you
via priority mail.
When you're in there claiming your free copy,
if you'd like to listen and learn or watch and learn,
there's audio and video formats.
Check out the educational webinars we do on a regular basis.
They're free, no charge.
You can even schedule an appointment
with an IUL professional that I oversee
that has had to pass a proficiency exam
that already understands all
of these nuances, like 1035 exchanges
and what I just explained in this video.
So hopefully, this video was educational for you.
Claim your copy of this book,
whether you're an IUL professional.
But if you are a consumer
and you wanna make sure it's done correctly,
learn and there's questions in here
that you can ask an IUL agent to see
if they really do understand it.
I don't want you to make any mistakes or kick yourself
because you didn't make sure it was done properly,
especially if you're exchanging an old insurance policy
for a new one and you wanna be grandfathered tax free
and hit the ground running
with as much money as you can into that new policy
if you've been grandfathering room under the old policy.
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