Many permanent life insurance policies offer cash value on top of life insurance protection. Cash value is money that you can spend while you are alive and is invested by the insurance company to grow over time. If you ever stop needing life insurance coverage, it might make sense to move your life insurance cash into an annuity. Annuities have a better rate of return than life insurance and offer more payout options, like guaranteed income for life. Converting your life insurance into an annuity is a quick and easy process through a 1035 exchange.
Contact your life insurance company and confirm that you have cash in your life insurance policy. You can't convert life insurance into an annuity if you don't have any cash value.
Ask the life insurance company how much you paid in premiums for your life insurance. When you later receive payments from your annuity, you'll get back the money paid in premiums tax-free.
Research the annuity market for the product that best serves your needs. Annuities vary in terms of payout rates, investment strategies, and fees so finding the right product makes a big financial difference. Your annuity can come from your current insurance company or from any other annuity company.
Tell the annuity company that you want to buy an annuity and fund it with the cash from a life insurance policy. The company will send over a representative with the paperwork necessary to make a 1035 exchange. With a 1035 exchange, you won't owe any income taxes for your transfer.
- Do not convert your life insurance into an annuity until you are sure you no longer need coverage. You won't be able to change your annuity back into life insurance.
Dylan Armstrong specializes in insurance, investing and retirement planning. He has also worked as a life and health insurance salesman and holds a Bachelor of Science in finance from Boston College.