This is a natural because you can transfer (1035 exchange) from a life insurance policy to an annuity without tax issues. The original basis on the life insurance policy now becomes the basis of the annuity which means that there are situations where an annuity could grow without occurring tax liability.
Here are some situation and general information about life insurance.
Types of Life Insurance
Term Life Insurance, insurance for a specific time period or term. 10 years as an example
Whole Life, insurance for your whole life. Guaranteed premium, death benefit and cash value. Whole life is guaranteed
Universal Life, Limited guarantees and the premium presented to the prospect is usually set by the agent. Funds accumulate in contract based on insurance companies declared rate. Very few UL policies have guarantees other than the good name of the company. Most UL I have seen are under funded.
Variable Universal Life, same as universal life except the funds are invested in separate accounts (like a variable annuity). Once again limited guarantees.
Single premium products. It is possible to buy single premium whole life, universal life and variable universal life. The value to this concept is with the correct policy you can give your prospects a fully guaranteed contract that will never require funding in the future. There are some variations that will not fully guarantee future results so always do the correct due diligence.
Life Insurance Sales Opportunities
1. Exchange: Life insurance cash value will transfer to an annuity without any tax liability. 1035 exchange
2. Remix: Sometimes you can use the cash value in an old policy to purchase a new life insurance contract. The purpose would be to have a paid up policy (no more premiums), remove any loans (forgiven) or to increase the ultimate death benefit to the beneficiary.
3. Policy loans: If you are lucky to find a policy loan on a life insurance policy, it is free money. Here is how that works, you can tell the client that you will get the loan forgiven. Most larger life policies are there for a long gone reason and the need for life insurance at this stage is less. Have the insurance company readjust the cost basis and forgive the loan. This changes the amount of non-taxable dollars but if it is paid out as a death claim it is tax free. If the need for life insurance no longer exists, have the life insurance company forgive the loan and 1035 the new basis to the annuity company. You sell this concept on two levels, loans go away and you use the exclusion ratio for their illustrated payout when the need arises for income. Easy sale and the loan going away will make the client love you and hate their insurance agent.
4. Annuity Change: If you find an annuity whose current purpose is to transfer the proceeds to a beneficiary, consider this. The tax deferred portion of an annuity is taxable as ordinary income to the beneficiary. So determine the taxable portion of the annuity, cash it in (withhold the tax liability for client) send the funds to a paid up policy with the cash value still available. When these proceeds are paid to the beneficiary they will be paid tax free. Just compare the future value of the life insurance with the after tax benefit of the annuity.
Although annuities are sold by companies that also sell traditional life insurance policies, often from the same website or brochure, it does not mean that annuities and life insurance are the same. In fact, many consider annuities to be the reverse of pure life insurance. However, there are certain options that are available in annuity contracts that allow them to have some life insurance benefits.
Life insurance is usually purchased to insurance someone against an unexpected death, and subsequently, loss of income. The person that is insured has beneficiaries that he wants to provide money too. For example, the holder may only want to insure that a beneficiary has enough to cover burial expenses. On the other hand, an insurance policy can provide funding to beneficiaries, such as a spouse or child, to cover debt and cost of living expenses.
As the reverse of pure life insurance, a basic lifetime annuity is not designed to protect against the unexpected death of the owner. Instead, it is designed to protect against the investor living longer than expected. It is an investment product that can be purchased with a lump sum or with premiums made over a period of time which will then allow the holder to receive income for the rest of his life. These products are become increasing popular to insure against the risk of the investor exceeding their life expectancy.
For an annuity to be considered as an alternative to life insurance, it would have to be purchased with a death benefit option, and even then it does not fully substitute life insurance. Usually at a minimum, the beneficiary of an annuity receives a payment equal to the sum of the payments made to the insurance company, less any partial withdrawals. For example, if a client purchased an annuity for $50,000 but had already received $5,000 in payments, then the investor's beneficiaries would receive $45,000.
If the original holder of the annuity lived "longer than expected" and had received payments beyond the original investment, then the beneficiaries would be less likely to receive a pay out. To demonstrate this point, assume that the same annuity that was used in the example above was purchased as a lifetime annuity. The person purchased the annuity for $50,000 and received $5,000 per year for life. If the person lived fifteen years, they would have received $75,000. There would be no principle amount left for the beneficiaries to receive.
Exact death benefits vary, so it is important to understand the individual contract before purchasing an annuity. For example, some contracts allow the purchaser to "step-up" the death benefit. If this feature is available, it means that there is a guaranteed minimum death benefit that is payable to the beneficiary regardless of the purchase payment or withdrawal status.
Lifetime annuities with death benefits can be used to insure the policy holder against living too long and also provide a payout to beneficiaries, like a life insurance policy. However, regular death benefits and "stepped-up" death benefits will come as an additional fee to an annuity contract and, therefore, should be compared against the alternative pure life insurance options before a purchase is made.