Making a life insurance purchase is often a "do it and forget it" decision. However, when it comes to permanent insurance, i.e., insurance designed to last for the rest of your life, this may not be the best strategy.
Take a look at the crediting rate being paid by your permanent life insurance plan and compare the rate with other options available to make sure you are earning the best available rate and making the most of your opportunity to earn cash value on a tax-deferred basis.
If you don't like what you see, you do have options. You can replace your life insurance with what the IRS calls a "1035 Exchange," which functions much like a Rollover IRA. The 1035 Exchange allows you to move the cash surrender value of your existing commercial life insurance policy to another company's insurance plan without losing the tax deferral you have been enjoying. A "1035 Exchange" can be a very effective tool for maximizing the value and benefit of permanent life insurance. Since the funds do not pass through your hands, but are transferred directly between the two insurance companies, the IRS does not tax the transfer. To qualify as a 1035 Exchange, the funds must be transferred into a new plan and the owner and the insured must be the same on both the old and new plans.
You can use a 1035 Exchange to move money from an old, underperforming life insurance plan into a new permanent plan with a different insurance provider. If you have an old policy you bought some years ago, or a small life insurance policy a parent or grandparent bought you when you born and gifted it to you at an older age, a 1035 Exchange allows you to turn these lower crediting rate plans into a higher earning plan. Look for an insurance provider that charges lower costs and pays higher crediting rates than your current insurance company.
While it's true that you can move your plan without losing the tax advantage you have been enjoying, you will need to pay attention to any charges or surrender fees made by your commercial life insurance company.
What to look for in a Permanent Life Insurance Plan
| Surrender Charges | Sales Commissions | Sales Fees | Long Term Care Option | 2012 Crediting Rate |
| NO | NO | NO | YES | 5-7% |
It is important to remember that while permanent life insurance includes a savings type component that can provide retirement income, life insurance itself isn't necessarily an investment. Also be aware that some commercial insurers may impose a surrender charge when you move your plan.
It is not always easy to make an apples-to-apples comparison unless you know which questions to ask. The first step is to call the agent or company that issued the coverage your currently have and request an "in force illustration." This illustration will depict the future guaranteed and projected build up of cash value and life insurance proceeds, and it will show you the current details of the original plan. The next step is to contact the new company and request a comparison illustration. They should work with you to identify the pertinent details of the current policy and provide an illustration of what the alternative permanent plan would look like.
Your potential new insurance provider should provide you a comparison quote for replacement coverage and explain the details on how a 1035 Exchange can benefit you. If you are not happy with what you see, keep looking.
