Making the most out of the 1035 exchange with single premium whole life
By Debie Knowles
Standard Life and Accident Insurance Company
In a fluctuating economy, today's producer must take advantage of every available opportunity to generate business. When looking for ways to promote new business, the answer you are seeking may be as close as the tip of your fingers -- in your existing life client database.
Instead of prospecting for new clients, a thorough mining of your current client base can turn up beneficial opportunities for both you and them. Revisiting past sales with the application of a tax provision, the 1035 exchange may net many of your current life clients the chance to increase their face amount or obtain better benefits by transferring their cash value into a single premium whole life policy without any immediate tax implications. For you, the producer, the transaction will serve to generate new commission, while building upon an already established client relationship. Cliché apropos, this is a win-win situation, and better still, the process is fairly simple -- and of no cost to you or your clients.
The 1035 exchange -- What's in it for the client?
In the real world, rare is the opportunity to get something for practically nothing, and yet, this prospect is exactly what a 1035 exchange has to offer. In most cases, surrendering an existing insurance policy is a taxable event, because any gain from the policy qualifies as ordinary income. A 1035 exchange is a section of the Internal Revenue Code that allows consumers to move the cash value from one life insurance contract to a new one without triggering a taxable event.
Why single premium whole life?
Single premium whole life (SPWL) insurance has many great benefits and can serve the needs of a variety of clients. These policies have living benefits as well as death benefits and they build cash value.
For the person whose primary interest is wealth transfer -- the transaction of leaving an inheritance for posterity -- SPWL products have guaranteed cash values and death benefits, and are tax-efficient vehicles for leaving a legacy. They allow policyholders to transfer portions of their liquid assets to heirs, charities or other organizations, or create education or trust funds in an environment protected from taxes and probate. For example, for a healthy 65 year old, a one-time deposit of $100,000 into a single premium whole life policy could result in a death benefit of approximately $200,000 or more to beneficiaries -- income-tax free.
They are also effective tools for covering the high costs of final expenses. Owners of SPWL policies can have peace of mind in knowing that their loved ones will be provided for and have protection from outstanding debts or lost wages after the death of the primary wage-earner.
Putting it all together through practical application
Now that we have examined the benefits of the 1035 exchange tax provision and single premium whole life insurance, let's consider a few scenarios where clients may benefit from transferring their cash value to an SPWL policy and how to broach the subject of a 1035 exchange.
Let's say a long-time client has a paid up life policy in her portfolio. You might give her a call to see if she would be interested in increasing her face amount without paying additional premium. Chances are she is very interested, and she's ready to talk. You've just made an appointment.
In this case, if your client qualifies, she can exchange her current life policy for one with a higher face amount. There would be no increase in premium and no immediate tax liabilities. Your client loves the idea. She now knows that you are concerned about her best interests and you have just strengthened this long-term client relationship.
Now let's look at a different scenario involving universal life insurance. Clients A and B are both good clients and long-time friends. Client A is a smart businessman and purchased his universal life policy when interest rates were high, but is now having to pay a higher premium to offset the lower interest rate. Client B also purchased her policy when interest rates were high but is now using the policy's cash value to pay the premium and is facing a depletion of her policy's value.
A 1035 exchange can benefit both client A and client B. If they qualify, each one is able to transfer the remainder of their cash value into a single premium whole life policy and never worry about paying premium on their life policies again. You now have very satisfied clients who won't hesitate to hand out your business cards to friends and acquaintances.
Consider one final scenario. Throughout the earlier stages of his life, this particular client has accumulated several small life policies -- a juvenile policy purchased by his grandparents, and a couple of life policies that are now paid up. Using the 1035 exchange process, you are able to transfer the combined cash value of the smaller policies into one single premium whole life policy with a larger face amount.
Looking back to move forward
The livelihood of the producer depends on sales. The quality and quantity of those sales can depend largely on persistence and ingenuity. The successful producer must be inventive, proactive and take full advantage of opportunities as they present themselves.
Single premium whole life insurance is a time-tested product that affords the insured a measure of financial security, predictably and comfort in today's transitioning economy. Combining a powerful product like single premium whole life insurance with a tax provision that allows your clients to essentially receive an upgrade to their existing coverage without negative tax implications is simply a smart move -- a smart move and a financially beneficial move for both client and producer.
In the process of generating more income, treading the grounds of new sales techniques may mean moving beyond your initial level of comfort when broaching the subject of new products with clients. However cautious one may be, the outcome of a successful encounter can far outweigh any discomfort. The mutual benefits that can come from the use of a 1035 exchange when applied to a single premium whole life product may well warrant a second look at your current client database. You may be surprised to find that your existing clients are your best source for new business.
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