How To Trade Your Annuity To Life Insurance

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Life Insurance to Annuity: Understanding the Basics

Life insurance and annuities are products designed to offer protection and financial security. However, they serve different purposes and have unique features. Let’s explore the basics of each:

Life Insurance

Life insurance is a contract between an individual and an insurance company, where the individual pays regular premiums in exchange for a death benefit paid out to their beneficiaries upon their death. It serves as a financial safety net, providing financial protection and support to the loved ones left behind during the policyholder’s passing. Life insurance can come in various types, including term life, whole life, and universal life, each with its features and benefits.


On the other hand, annuities are financial contracts between an individual and an insurance company, where the individual makes a lump sum payment or a series of payments. In return, the insurance company guarantees a regular income stream for a certain period of life. As a result, annuities are commonly used as a retirement planning tool, providing a reliable source of income during retirement years. There are different types of annuities, such as fixed, variable, and indexed, each with advantages and risks.

Related Reading: What is Annuity Insurance?

1035 Exchange Annuity To Life Insurance

Why Trade Your Annuity For Life Insurance?

The best reason to purchase life insurance rather than annuities is that your beneficiaries can inherit a tax-free death benefit. Other reasons include the following:

Annuity for Life Insurance: Key Considerations

Now that we understand the basics of life insurance and annuities, let’s delve into the key considerations when contemplating an annuity for life insurance.

Retirement Planning

One of the primary reasons why individuals consider annuities is retirement planning. An annuity can provide a predictable and stable income stream during retirement, which can help cover living expenses, healthcare costs, and other financial needs. In addition, unlike life insurance, which pays out a lump sum benefit upon the policyholder’s death, annuities provide a regular income stream that can last for life, offering peace of mind and financial security in retirement.

Tax-deferred Growth

Another advantage of annuities is the tax-deferred growth they offer. While contributions to an annuity are made with after-tax dollars, the earnings on the annuity are not subject to taxes until withdrawn. This can provide potential investment growth without the burden of immediate taxes, allowing the investment to compound over time. In contrast, the death benefit paid out by a life insurance policy is generally tax-free, making life insurance a favorable option for estate planning purposes.

Annuity To Life Insurance 1035

Annuity Life Insurance Policy: Understanding the Benefits

Annuity life insurance policies, also known as combination or hybrid policies, are insurance products that combine features of life insurance and annuities. Let’s explore the benefits of this unique product.

Flexible Financial Planning

Annuity life insurance policies offer flexibility in financial planning. They provide a death benefit that can be paid to beneficiaries upon the policyholder’s death, similar to traditional life insurance. However, they also offer the option to convert a portion of the death benefit into an annuity, providing a regular income stream during the policyholder’s lifetime. This flexibility allows policyholders to customize their financial plans based on their unique needs and circumstances, providing a versatile retirement and estate planning tool.

Potential for Cash Value Accumulation

Depending on the policy’s features and structure, annuity life insurance policies may also have the potential for cash value accumulation. Cash value is a portion of the premiums that are invested and grow over time, potentially offering a source of savings or investment growth. In addition, this can provide additional financial security and flexibility, as policyholders may be able to access the cash value through policy loans or withdrawals, if needed, during their lifetime.

Best Reasons to Purchase Life Insurance Rather Than Annuities

While annuities and annuity life insurance policies offer unique advantages, there are also compelling reasons why individuals may choose to purchase traditional life insurance instead. Let’s explore some of the best reasons for opting for life insurance.

Income Replacement

Life insurance is primarily designed to provide income replacement in the event of the policyholder’s death. Life insurance can offer a vital safety net if your dependents or loved ones rely on your income to cover living expenses, pay off debts, or fund future financial goals. It can provide a lump sum death benefit that can be used to replace the lost income, ensuring that your loved ones are financially protected and able to maintain their standard of living.

Lower Costs

Life insurance premiums can be more affordable than annuities or annuity life insurance policies, especially for term life insurance. Term life insurance covers a specified term, such as 10, 20, or 30 years, and typically has lower premiums than permanent life insurance or annuity products. This can make life insurance a cost-effective option for individuals who want to ensure their loved ones’ financial security without increasing premiums.

Converting Life Insurance to Annuity: Exploring Options

If you already have a life insurance policy but are considering converting it to an annuity, it’s essential to understand the available options and considerations.

1035 Exchange

One option to convert life insurance to an annuity is through a 1035 tax-free exchange. This provision in the Internal Revenue Code allows policyholders to transfer the cash value of a life insurance policy to an annuity without incurring immediate taxes on the gains. This can be a strategic financial planning move, as it allows policyholders to defer taxes and potentially benefit from the annuity’s features, such as tax-deferred growth and regular income payments.

Considerations and Risks

It’s essential to carefully evaluate the pros and cons of converting life insurance to an annuity. Some factors to consider include the surrender charges or fees associated with terminating a life insurance policy, the potential loss of the life insurance death benefit, the annuity’s fees and expenses, and the overall financial goals and needs. Working with a qualified financial professional can help you navigate the complexities and make an informed decision that aligns with your financial objectives.

Converting Life Insurance To Annuity Exploring Options

Replacement Can Be Best Described As…

Replacement can best be replacing an existing life insurance or annuity policy with a new one. This is often done to improve the policy’s features, benefits, or pricing or to align with the policyholder’s changing financial needs or goals. However, it’s essential to approach policy replacement carefully, as it can have potential implications for the policyholder’s financial situation.

Reasons for Policy Replacement

There are several reasons why policyholders may consider replacing their life insurance or an annuity policy. These can include seeking better investment performance, lower premiums, enhanced death benefit options, improved policy flexibility, or changes in personal circumstances, such as marriage, divorce, or childbirth. Policyholders may also consider a replacement if they are not satisfied with the performance or service of their current policy or insurance provider.

Risks and Considerations

Policy replacement also involves risks and considerations that need to be carefully evaluated. These can include surrender charges or fees associated with terminating the existing policy, potential loss of the original policy’s features or benefits, and the impact of a new policy on the policyholder’s overall financial plan. Therefore, it’s essential to review the terms and conditions of the existing and proposed policies thoroughly and work with a qualified insurance professional to assess the potential risks and benefits of policy replacement.

How To Exchange An Annuity For Life Insurance

Under normal circumstances, you can not transfer or exchange an annuity directly into a life insurance policy. However, that doesn’t mean it can’t be done. Here are two methods to trade your annuity for a life insurance policy.

  • Method #1: Withdraw from the annuity and fund a limited-pay life insurance policy.
  • Method #2: Purchase an Annuity/Life Insurance Hybrid Plan.

Limited Pay Life Insurance Policy

Which Of The Following Is The Best Reason To Purchase Life Insurance Rather Than An Annuity

How Is Trading The Annuity For Life Insurance Taxed?

In almost every case, the owner will be taxed on a portion or all of each payout from the annuity.

Non-qualified Annuities

Systematic withdrawals from a non-qualified deferred annuity (after-taxed money) are considered to come first out of earnings, then out of the contract’s initial investment premium. This tax method is called Last In, First Out, or LIFO. The earnings portion of the withdrawal is considered taxable income to the annuitant.

When non-qualified annuities are 1035 exchanged to a hybrid plan, part of each immediate annuity payout will be a non-taxable return. The remaining portion of the payout represents a taxable gain. For each SPIA payout, your client will receive a 1099 form stating the taxable portion from the company. The insurer will also report the taxable amount to the IRS.

Qualified Annuities

All systematic withdrawals from an IRA annuity are subject to ordinary income taxes.

For the hybrid plan, the SPIA payout will be taxable as ordinary income. The annuity will receive a 1099 form for each year’s taxable amount, and the company will report the taxable amount to the IRS.

Hybrid Plan Sample Rates

$50,000 of pre-taxed premium could equal a tax-free death benefit, equating:

GenderAge 60Age 65Age 70Age 75

When considering these sample rates, understand the $50,000 has not been taxed yet. So what would the $50k be worth after federal and state income taxes are taken out? Then, after considering this reduction, compare it to the tax-free sample rates above.

What Annuities Can Not Be Replaced?

Next Steps

Life insurance and annuities are financial tools that can provide valuable benefits and financial protection for individuals and their families. Annuity life insurance policies offer a unique combination of life insurance coverage and annuity features, providing flexibility and potential for cash value accumulation. However, traditional life insurance policies have advantages, including income replacement and potentially lower costs. Therefore, converting life insurance to annuities or replacing policies should be carefully considered based on individual financial goals and needs and with the guidance of a qualified insurance professional. Ultimately, the best approach will depend on the policyholder’s specific circumstances and objectives, ensuring that the chosen option aligns with their long-term financial plan and protects their loved ones.

Annuity To Life Insurance

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Frequently Asked Questions

Which of the following is the best reason to purchase life insurance rather than an annuity?

The best reason to purchase life insurance rather than an annuity is to provide financial protection for loved ones in the event of the policyholder’s death. Life insurance ensures that beneficiaries receive a payout, which can be used to cover outstanding debts, mortgage payments, and other financial obligations. An annuity, on the other hand, provides a regular income stream during retirement but does not offer the same level of protection for dependents.

Life Insurance and annuity replacement can be best described as?

Any transaction in which a new life insurance policy or annuity is bought to replace an existing one is referred to as a replacement.

Can you exchange an annuity for a life insurance policy?

According to the tax code, you can exchange a life insurance policy for another life insurance policy or an annuity without paying taxes. However, exchanging an annuity contract for a life insurance policy is prohibited.

Can you convert life insurance to annuity?

To convert life insurance to an annuity, an individual can explore options like a 1035 exchange or surrendering the policy for its cash value. A 1035 exchange allows for a tax-free transfer of the policy’s cash value into an annuity while surrendering the policy means canceling it and receiving the accumulated cash value.

Which is better, life insurance or annuity?

Life insurance safeguards your family in case of your death; annuities, on the other hand, offer a reliable income source for you over time so that you won’t outlive your resources.

How do I cash in an existing annuity?

If you want to access the funds from your annuity, contact your insurance provider and request a surrender form. Consider if it’s best to cash out all or just some of the money before filling in this document and sending it back. Once submitted, your insurance company will continue processing the transaction.

Where can I move my annuity money?

When transferring a qualified annuity, you have two choices: cash out and repurchase or simply liquidity the current account and invest in a new one. Unfortunately, this is not an effective strategy, as once you receive the funds from cashing out your annuity, you must pay taxes on them at the regular income tax rate.

Can I trade my annuity?

If you’re in a situation where your annuity payments are no longer meeting your financial needs, don’t worry. You can turn those future or current payments into cash by selling them! Now is the time to take advantage of this lucrative opportunity and get additional money when needed.

What can I transfer my annuity to?

Deferred Annuities can be seamlessly transferred from one IRA to another without triggering any tax liabilities.

Can whole life insurance be converted to an annuity?

Yes, whole life insurance can be converted to an annuity. By converting a whole life insurance policy to an annuity, the policyholder can receive a steady stream of income during retirement. This conversion allows for a seamless transition from life insurance coverage to a guaranteed source of income in retirement.

What does liquidity refer to in a life insurance policy?

Liquidity in a life insurance policy refers to the ease with which the policyholder can access cash value or surrender the policy for a lump sum. It allows individuals to borrow against the policy, withdraw funds, or terminate the policy if needed. Liquidity provides financial flexibility and can be beneficial in times of emergencies or changing financial circumstances.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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