Facts of Life Insurance – Internal 1035 Exchanges

You don’t ever change your mind, do you?  You don’t ever move?  Your life is static, right?

When mortgage rates started dropping several years ago was it your bank that first reached out to you about refinancing?  Probably not.  Why would they?  You are content paying 6% on your loan.  Why would they call you up and offer to refinance your loan for 4%?  They just sliced off extra interest they would have earned and it impacts their bottom line.  Now if you call them and say another lending group is willing to do a refinance at 4% then they will jump at the chance to keep that loan with them.  Why be proactive when you don’t have to be?

Insurance companies work in a similar way even establishing 10-20 year surrender terms if you want to cash in or exchange the cash value in your policy.  It sounds similar to a prepayment penalty for a bank loan doesn’t it?  Even if there is a better product of insurance with lower fees or a more up to date life expectancy table your current insurance company isn’t going to tell you about it.(http://brevityassc.blogspot.com/2015/04/facts-of-life-insurance-policy-review.html)  Maybe you find a better policy with another company after 10 years but you are hamstrung because you have a 20 year surrender period and taking a 25% hit on your cash value to move it into a better product still doesn’t make financial sense.

You could try an internal 1035 exchange.  As an independent agent we can sift through the different types of permanent insurance policies within that company and see if you can do a penalty free 1035 exchange.  This way you don’t get dinged with a surrender charge.

Here’s an example:

A client bought a permanent policy in 2005.  He has accumulated $150,000 of cash value.   Being a smart consumer he wonders if this is still the best plan for him.  Is he still paying the right amount?  Is the amount of insurance still appropriate?  The short answer is we can improve his existing policy based on his cash value position but, his surrender value is $100,000.  Taking a $50,000 haircut is tough to justify.  After digging into the other products at that carrier, we realize he can move it into another product that is better suited for him now without losing his $50,000.

There can be cases based on the company and the type of products they offer where it still makes sense to switch to another carrier even if you have to leave some money on the table.  Getting objective feedback and comparing the proper inforce illustrations will show you if you should make that switch.

Calling your insurance company or a captive agent is not the right tact.  They aren’t out to get you but, they are going to tell you your policy is running just fine.(http://brevityassc.blogspot.com/2015/03/facts-of-life-insurance-captive-vs.html)  Many independent agents aren’t aware of having this as an option.  They may lose money or earn less by doing this versus switching to another company but, doing the best thing for the client takes priority.

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Brevity & Associates

Brevity & Associates