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Article Archive >> Business

Advice From Labib: How Can I Upgrade My Insurance - Tax-Free?

Advice From Labib
How Can I Upgrade My Insurance - Tax-Free?

Responding to the changing needs of consumers, the life insurance industry has developed some exciting alternatives that go much further in satisfying a variety of financial needs and objectives than some of the more traditional types of insurance and annuities.
Advancements
Modern contracts offer much more financial flexibility than traditional alternatives do. For example, universal life and variable universal life insurance policies allow policy owners to adjust premiums and death benefits to suit their financial needs.
Modern contracts can also provide much more financial control. Whereas traditional vehicles, such as whole life insurance and fixed annuities, provide returns that are determined by the insurance company, newer alternatives enable clients to make choices that help determine returns. For example, variable annuities and variable universal life insurance allow investors to allocate premiums among a variety of investment subaccounts, which can range from conservative choices, such as fixed-interest and money market portfolios, to more aggressive, growth-oriented portfolios. Returns are based on the performance of these subaccounts.
Withdrawals from a variable annuity prior to age 591_2 may be subject to a 10% federal income tax penalty. Generally, a surrender penalty will apply if the withdrawal is made during the early years of the contract. Variable annuity subaccounts fluctuate with changes in market conditions. When the annuity is surrendered, the principal may be worth more or less than the original amount invested.
There are many differences between variable- and fixed-insurance products. Variable universal life insurance offers several investment subaccounts that invest in a portfolio of securities whose principal and rates of return fluctuate. Also, there are additional fees and charges associated with a variable universal life insurance policy that are not found in a whole life policy, such as management fees. Whole life insurance offers a fixed account, generally guaranteed by the issuing insurance company.
A Dilemma
So, what should you do if you want to cash out of your existing insurance policy or annuity contract and trade up to one that better suits your financial needs, without having to pay income taxes on what you've accumulated?
One solution is the "1035 exchange," found in Internal Revenue Code Section 1035. This provision allows you to exchange an existing insurance policy or annuity contract for a newer contract without having to pay taxes on the accumulation in your old contract. This way, you gain new opportunities for flexibility and tax-deferred accumulation without paying taxes on what you've already built up.
The rules governing 1035 exchanges are complex, and you may incur surrender charges from your old policy or contract. In addition, you may be subject to new sales and surrender charges for the new policy or contract. It may be worth your time to seek the help of a financial professional to consider your options.
(ITALICS)Variable annuities and variable universal life insurance are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Alfred Labib is an Independent Financial Advisor. "Our Goal Is To Help Investors Grow And Preserve Their Wealth Through Discipline And Process." 301-766-2039, www.labibfinancial.com.

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