If you want to convert your life insurance policy to an annuity—or are thinking about it—there are some key things to take into consideration.
Imagine this scenario:
Tom will retire in a few years. Decades ago, he opened a life insurance policy to provide security for his young family. His children are grown now and financially secure. He continues to pay the insurance premium but feels the policy is more than he needs.
He’s considering transferring the policy to an annuity to provide a stream of income for his retirement. But he knows annuities can be complicated—mostly because there are different types of annuities with varying conditions.
He talks to his retirement specialist who walks him through the key points of converting his life insurance policy to an annuity.
Turn insurance policy dollars into retirement income
If you’ve paid into a life insurance policy and built up its cash value, your carrier may allow you to convert it to an annuity. The transfer will provide guaranteed income for the rest of your life.
How it works
Your advisor will lay out your annuity options—from variable to fixed annuities.
Together, you’ll explore your conversion options and find the annuity contract that best fits your needs. Generally, getting an annuity started requires turning over a lump sum of money. Transferring the policy will enable you to fund the new annuity.
Once the transfer is complete, you’ll start receiving payments (at a time specific to the contract) for the rest of your life (like you do social security benefits).
It’s also worth noting that with some contracts, you may be able to pass the benefits to your spouse. If this is important to you, talk to your carrier about including that in the contract. Also, make sure you fully understand the details, as the benefits will mostly likely be reduced.
Understanding the taxes
Of course, the cashed-out earnings from your policy will qualify as income. Normally, that would require paying taxes.
Thank goodness for the 1035 Exchange!
The 1035 Exchange is part of the tax code that allows policyholders to transfer funds from an insurance policy to an annuity—without having to pay income tax.
Doing an exchange (versus surrendering a policy) is especially helpful for people who’ve paid into a policy for a long time but who find it no longer fits their needs.
That might include taking advantage of lower fees or more flexible investment options or simply needing a greater cash flow for their retirement years.
Either way, the IRS allows an exchange from one policy to another—tax free.
Shop around and ask questions
If you’re interested in converting your life insurance policy to an annuity, dig into the details:
Find out about carriers’ payout options and contract conditions.
Weigh all the advantages and disadvantages
Make sure your new contract is issued before the existing policy is terminated.
Ask about surrender charges—the fee a carrier might charge for canceling the policy.
Ultimately, when it comes to your retirement plan, you are the decision-maker. In other words, shop around, compare plans and ask questions before you sign anything.
Are you paying for permanent life insurance that you’d rather turn into guaranteed income for retirement?
MySeniorHealthPlan.com’s Retirement Specialist Aaron can answer all your questions. Click here to schedule a free consultation.