Beating the F.E.A.R. Factor

15 Minutes to Your Ideal Retirement

1035 Exchanges

Action Memo


Hidden Strategy to Upgrade Your Annuity or

Life Insurance...




In this Action Memo You Will Discover:


  • How you can exchange certain insurance policies and annuities

  • Why you ought to do it

  • What difference it makes in your financial future

  • What are some of the pitfalls that you might want to look at before you exchange



It takes only a few minutes to read this Action Memo and learn whether a 1035 Exchange might help you: 


1.   Create a lifelong stream of tax-free income

2.   Increase the income from your annuities

3.   Lower the cost of your life insurance premium

4.   Raise the death benefit to your heirs without raising  the premium

5.   Move from volatile investing to guaranteed investing

6.   Get a firm grip on the tax basis of your annuity holdings


Imagine if you kept a certificate of deposit for 25 years regardless of how low the interest rate, because you just did not know they could move the money.  Today, there are literally millions of consumers in the United States with annuities or life insurance policies who do not know they can better their position, tax-free, through a properly structured Section 1035 Exchange.


If you are one of them, you are about to have an “ah ha” momentRead on...


What is a 1035 Exchange? 1035 Exchange is named, as you might expect, after Section 1035 of the Internal Revenue Code, which allows for certain ‘like kind’ exchanges of property with no taxable gain or loss to you.  There are similar sections in the code, for example Section 1031 allows for exchanges of real estate, for one piece of property to another.  But, Section 1035 deals specifically with insurance products such as annuities or life insurance (considered ‘like kind’) and talks about the rules that one follows in doing a tax-free exchange of those products.


You cannot exchange just any insurance policy for any other one or any annuity for just any other.


What exchanges can you make?


You can go from:


·       A variable annuity to a fixed annuity

·       A variable annuity to a fixed indexed annuity,

·       A traditional fixed annuity to a fixed index annuity

·       A life insurance policy to another life insurance policy

·       A life insurance policy with cash value to an annuity

·       But, be aware, you cannot simply move from an annuity to a life policy on a tax-free exchange basis.


Definitions: Read these definitions and you will learn what the above refers to. You will also learn whether you have any of them. The language of personal finance is sometimes so hard to understand that you do not even know whether you have an asset or not.


Let’s fix that now.


·       A variable annuity- A contract with an insurance company that provides payments which vary depending upon the investment success of a separate investment account. Because the invested funds primarily follow an equity-based index, this annuity offers greater potential rewards and greater attendant risks than annuities supported by fixed-income securities.” Paraphrased from: “Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company.


·       A fixed annuity- A contract with an insurance company that guarantees a stream of unchanging payments for a specific period or for an individual's lifetime, depending on the terms of the annuity contract. Paraphrased from: “Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor” by David L. Scott. Copyright © 2003 by Houghton Mifflin Company.



·       A fixed indexed annuity- A special class of annuities that yields returns on your contributions based on a specified equity-based index, but with a guaranteed minimum return, so even if the stock index does poorly, the annuitant will have some of his downside risk of loss limited. However, even in a bull market annuitant's yields will be somewhat lower than a stock index due to the combination of caps on the maximum amount of interest earned and fee-related deductions. Paraphrased from: Investopedia


·       Cash value in an insurance policy- A type of life insurance policy that pays out upon the policyholder's death, and also accumulates value during the policyholder's lifetime. The policyholder can use the cash value as a tax-sheltered investment (the interest and earnings on the policy are not taxable), as a fund from which to borrow and as a means to pay policy premiums later in life, or they can pass it on to their heirs. Whole life, variable life and universal life are all types of cash-value life insurance. From: Investopedia


Under the 1035 rules the ownership has to go like-to-like to make any approved exchange.

You cannot exchange a policy owned by your spouse for one owned by you, or vice versa.  The ownership has to maintain as the same.


In short, so long as the owners are the same, life insurance policies can be exchanged and an insurance policy with cash value could also be exchanged for an annuity, but you can't go the other way - not an annuity for a life policy.

Action alert: Fill out this chart:


Whether You Make an Exchange or Not

You Should Know this Information


Do You Own...

What is its Present Value

By How Much Does it Grow Annually












Fixed Index Annuity




Cash Value Life Insurance





Action Alert:  If you are not sure about these, we will do an analysis for you.  Contact us at xxx.


What is the benefit of exchanging a life policy or an annuity?


Here are 6 ways your position may be improved by a like-kind exchange:


#1. You can get more death benefit for less or the same premium


Real Life Example: We had a client who had a life policy for $1 million which she bought to leave to her son. We analyzed her premium and found that if we did a tax-free exchange of the old policy to a new policy for the same outlay ($20,000 per year), she would have $1.340 million of death benefit, instead of the $1 million death benefit, a $340,000 gain to her children down the road just by doing this tax-free exchange, with no additional out of pocket expense to her. 


Action Alert: If your goal is leaving a legacy, and you bought your policies a while ago, have them looked at to see whether you can do even better for your family. Contact Us at xxx.


#2. You can reduce insurance premiums


Policies that were issued years ago were issued on the basis of mortality tables where the actuaries were assuming shorter life expectancies, and so the cost of insurance was more.  Now, with the newer tables where life expectancy is longer and cost of insurance is often less, you can sometimes make dramatic improvements in the death benefit your family receives.    


You may also be able to lower the premium and get the same death benefit. A tax-free exchange may lower the cost of insurance.


#3. You can reduce annuity fees


Real Life Example: A client had an annuity that was beyond the surrender charge period (many annuities charge a fee if you liquidate before a certain date called a ‘surrender charge’). We discovered that he was paying fees he did not know even existed like: mortality and expense factor charges, rider costs, administrative expenses, and fees on the various sub-accounts.


It was shocking. We often find people are paying 3.5% per year or more.  In his case we found that he was paying over $35,000 a year.  And I said, "Do you realize what you're paying on this over a 10-year period?"  Needless to say, he was shocked, too. 


So if our objective is to lower costs, an exchange may be the correct move.  Keep in mind one disadvantage of doing a tax-free exchange from an older annuity to a newer annuity is that the newer annuity may have a new surrender charge period, which means, during the next seven to ten years, you would be penalized if you withdraw more than 10% of the annuity value in a given year



Are you overpaying? Go back to your chart and write ‘yes’ or ‘no’ next to each product you own under the heading ‘FEES.’ If you do not know how much you are paying in fees, we will give you an analysis. We will do our ‘hidden fee analysis for your mutual fund portfolio as well. Just contact us at XXXX



#4. You can protect your variable annuity against loss.


The value of your accounts can go down in variable annuities. In 2008 you would have to make 67% to make up for your losses.





And such ‘corrections’ take place about every 8 years.





To protect your annuity money against loss it may be appropriate to upgrade or do a tax-free exchange to a fixed annuity or perhaps a fixed annuity that offers index linked interest. 


Real Life Example: An older lady was in the office last week. Do not ask me how this happened, but an advisor recommended a totally, in my view, inappropriate variable annuity that put her money at risk in mutual fund-like sub-accounts where her money is subject to going backwards.  Now the last thing this nice lady wants is an annuity where her money can go backwards. 


Her particular need is for additional income, so to correct this problem we recommended a tax-free exchange of her variable annuity to a fixed annuity that offers index linked interest with a lifetime income guarantee. 


At her age, if she does this exchange and starts to take the income a year from now, the lifetime income stream guaranteed is in excess of 7% of the amount being exchanged per year, every year for the rest of her life, whether she lives to 92 or 102.

Text Box: Here is the most important part: The account will never go backwards even when the market goes backwards.


Your balance is not subject to the vicissitudes of the stock market and all of that volatility.  It is solely up to you whether or not you want to make withdrawals in excess of earnings. So if your mindset is to withdraw no more than what you are actually earning each year, you can do that.  If you want to withdraw a little more than that, knowing that you never exhaust the income stream that is an option for you too.


# 5. You can create a lifelong stream of income.

Many times older adults want a lifelong stream of income that makes them secure. They are ‘sold’ an ‘immediate annuity.’ With an immediate annuity you are trading your lump sum for a stream of payments and you are giving up control.  I am not fond of that concept of loss of control, and I think you are not either.


If you already have an annuity, a far better approach could be a tax-free exchange to a company that offers a guaranteed lifetime income stream at an attractive rate, maybe 5%, 6%, even 7%, as we discussed above. 


We do not want you giving up control over your nest egg.  We want that lump sum staying intact and ultimately passing on to surviving spouse or to children or grandchildren.  Since we are moving towards a pensionless society, we must create a pension-like guaranteed income for ourselves. We use lifelong income annuities. 


#6. Increase the earning potential of the cash value of your life insurance policy.


If you have an existing dividend paying whole life policy which you bought years ago, and the dividend projections that the insurance company used when you purchased were much higher than what is being used today, you may be very disappointed as what you are earning.  Oftentimes a tax-free exchange of that cash value into something that makes a lot more sense for you in terms of earnings potential, whether a different policy or an annuity, will fix the problem. 


Action Alert: Let us design a lifelong income tax-free strategy for you. It starts with education. Take our 12 webinar series free course. Register: www.xx


Frequently Asked Questions:


Can I just surrender a policy or an annuity and buy a new one?


Surrender and re-buy is a taxable event. You will get a surprise with a 1099 and a tax liability. 


If any of the 6 Benefits seem good to you, contact us and we will give you an analysis and guide you through a decision. If you decide on an exchange we will implement the exchange for you so it is tax-free.


Can I make a partial 1035 exchange?


Some companies will allow for partial exchanges and others will not.  Section 1035 of the tax code allows for partial exchanges, but not every insurance company allows for it.


Action Alert: We will research whether your policy or annuity can have a partial exchange free of charge for you. Contact XXX


Can I make changes in the beneficiaries when I make an exchange?


You are free to change beneficiary designations either before or after the exchange unless you have selected an irrevocable beneficiary designation.


Real Life Example: I had a lady in the office not too long ago that was in poor health. She worried that if her husband remarries a new spouse might influence him to change the beneficiary designations on her annuity. I pointed out she has the option to make the beneficiary designation irrevocable.



Will I have a change in cost basis after I make an exchange?


You will not have a change in “cost basis” after a 1035 exchange if you do it right.


Cost basis is the amount you paid for an investment minus certain fees. With the 1035 exchange your original cost basis follows you. The paper work tells you what the IRS considers the cost basis. So if you liquidate and make a profit you know exactly how much tax you will pay.


Real Life Example: A client put $100,000 in an annuity many years ago, by now it had quadrupled in value. Somebody is going to be paying the income tax liability on the tax deferred gain.


So what often sadly happens is the annuity owner will pass away and leave the annuity to a son or daughter.  The son or daughter submits a claim form, gets the money all at once, and incurs the tax liability all at once. Whereas, if they had done tax planning they could have chosen from a variety of better ‘settlement options.’ For example, they could take the annuity out over 5 years and spread the tax liability.


If I have a loan against an insurance policy can I still do a 1035 exchange?


There are some insurance companies that allow you to carry over the loan balance to the new policy, and there are others that will not offer the exchange. 


Action Alert: If you have a policy with a loan, we can help you find the right company with which to exchange. Contact xxxx


If you do not have a loan, maybe you should have. Many people have a loan against the value of their policy because they created a strategy to draw tax-free lifelong income from their policy. We create and implement such strategies for our clients.


If you are interested in participating in the stock market with guarantees against loss, and creating a guaranteed, lifelong, income tax-free ‘pay check’ for yourself, we will educate you. Check out www.Gelok& home page for a brief video on the process.


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Advisory services offered through Ronald Gelok & Associates, LLC, a Registered Investment Advisory firm registered with the State of New Jersey and the State of Florida.

Ronald Gelok & Associates proudly offer financial services such as Tax Free Retirement, Retirement Planning, Indexed Life Insurance, Univeral Life Insurance, Retirement Income, Tax Free Living in Parsippany, New Jersey and New York area.

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