September 13, 2016
David Littell

Occasionally a client has a universal life insurance policy that is not meeting expectations. This may happen if the policy returns have underperformed or the client hasn’t contributed as much as planned. When this happens, keeping the policy in force requires larger additional premiums than the client can afford or that would make sense based on the death benefit involved. When this occurs, it is common for the client to simply cancel the policy and retain the remaining cash value.

In many cases the cash value is modest, but the cost basis for the premiums can be significant. Cancelling the policy means losing the opportunity to recover the cost basis in the contract. A way to improve your client’s tax situation is to make sure that the cost basis can be used to offset other taxable income. In this video, Curtis Cloke shared a number of ways to address this concern by doing a 1035 exchange to an annuity contract. The cost basis from the universal life policy is retained in the transfer, and can reduce or eliminate taxes on subsequent withdrawals from the annuity. Curtis goes into details about a number of strategies, including making an exchange to an income annuity, and combining several deferred annuities.

Tax ideas like this are a great way to provide value to your clients!