Can I Trade My Annuity For a Life Insurance Policy?

By Nathan Garcia | Estate Planning

Oct 24

If you are considering canceling your annuity and buying a life insurance policy, you want to understand what the considerations are before you do so. Please don't you make a decision without the right information, if not you may end up paying surrender fees and taxes as a result of this decision.

It is smart to know upfront what the different considerations are before you cancel your annuity policy and try to buy an insurance contract.

Can I Trade My Annuity For a Life Insurance Policy?

Hi my name is Nathan Garcia, I'm a certified financial planner and retirement planning specialist, I hope people answer question like these before they enter into an retirement, so that they will have more clarity and confidence in their retirement income and their investment strategy.

So this is a question that comes out a lot because people may have an old annuity policy and they are more concern about living money on to the next generation and so if you find yourself in that type of situation this video will be helpful for you.

Of course this is an investment advise for you and you should consult a professional before you take action on anything that you see in this video this is just for educational purposes only so.

So the short and simple answer is that you could transfer a life insurance policy into a new life insurance policy using something called a 1035 exchange but the IRS rules don't allow you to transfer the proceeds of an annuity into an insurance policy.

And the reason being is that an annuity is typically in a securities product. So it has an investment component to it whereas an insurance policy is an insurance product and they have different regulations and different standards there.

So if you're going to cancel your annuity you have to surrender the contract itself take the money from that contract and then go out and buy the life insurance policy. 

Depending on how long you've owned the annuity and the annuity type you could end up paying surrender fees for cancelling the annuity early or you could pay taxes based on any gains that you have have in the annuity.

So before you cancel that annuity I would typically look at the different riders that are set up on the annuity itself.

Sometimes there will be a death benefit that is tied to the annuity and this could serve to meet the same goal and that there will be a sum of money provided if somebody passes away but it could help you avoid the surrender penalties and maybe even delay some taxes there.

The individual situation is really going to drive this decision here but I just want to lay that as a common path that we would go down the other consideration with this is why do you want the life insurance policy.

If you're looking to say spend more in retirement and replenish your invest-able assets with the life insurance policy then there maybe other ways that you can get to the same goal using different methods.

And so we want to explore all of these options and the easiest way to do that is with a financial plan your financial plan is going to look at your income investments your insurance your which is a part of your estate plan your social security in your healthcare and by looking at all of these different variables in one model, we can get a better understanding as to what your income looks like in retirement.

Once we can determine what that income looks like then we can also make a prediction as to what value will be left over after you die.

If that value is sufficient and meets your goal then you may not need a life policy whereas if that value is not enough then we may look at a life policy but we may want to combine it with different features like long term care protection.

Nowadays, there are a lot of hybrid policies life insurance policies that can be used to tackle multiple concerns for individuals for retirees so before you purchase a life policy or cancel your annuity policy make sure that you're looking at your financial plan and you're using that to determine if you should purchase a life policy and how much on which type.

So, I hope that you found this video helpful, its not an easy topic to cover especially in a YouTube video but if you have any questions please let me know.

Safe Harbour Planner

About the Author

As a retirement planning specialist my goal is to help people overcome the anxiety involved with giving up their job and transitioning to retirement. I do this using a comprehensive financial plan to model your financial world and the "what ifs" that retirement holds.