1035 Tax-Free Exchange - Part 1

A 1035 tax-free exchange is another alternative, provided you are still insurable at acceptable rates.

You may make an absolute assignment of the current contract to the same or another company and trade the policy in on a new contract without incurring current tax liability. Once the absolute assignment is complete, the new insurance company directs the old one to drop the old policy and send a check for the proceeds directly to the new company. The new company then manages the investment as provided in accordance with the replacement contract.

This provides a tax-free transfer of your cost basis from the old contract into the new one. This might retain the large cost basis of an old, unprofitable policy, or it might protect a gain in the policy that otherwise would be taxable.

The unique advantage of whole life insurance is that if you pay the level premium, you have the coverage and do not have to worry about personal management of the investment vehicle. The company's long-term bond and mortgage portfolio is supposed to provide stable and historically consistent results. These results have been used to establish life insurance purchasing strategies.

Short-pay, quick-pay, four-pay life, and seven-pay life are premium-paying strategies frequently presented as possible with a whole life contract that normally requires premiums payable for life. These limited pay periods are made possible by using part of the investment return, dividends from the long-term bonds and mortgages, to pay the mortality and expense charges for the rest of the insured's life.

Whether such proposals actually work or not depends upon whether the actual investment results are at least as good as or better than the predicted results in the illustration presented. In the distant past, these strategies worked well to minimize cash-flow into a policy while maintaining life insurance protection.

They have not worked well in the present. Decreasing interest rates and increasing regulation have reduced dividends for all life insurance companies and have caused dividend disappointments for all. Actual investment results of quality companies have exceeded the illustrations in periods of increasing interest rates and been below those illustrated in periods of decreasing interest rates. You can count on it-that is economic gravity.