How To Trade Your Annuity For Life Insurance

Shawn Plummer

CEO, The Annuity Expert

A lot of people have annuities and are not sure what they should do with them. You might be one of those people who is looking for a way to trade your annuity for life insurance. If you’re looking for some guidance, then you’ve come to the right place! In this guide, we will discuss how to trade your annuity for life insurance and help you make an informed decision about what’s best for your situation.

Why trade your annuity for life insurance?

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 a Annuity/Life Insurance Hybrid Plan.

Limited Pay Life Insurance Policy

  1. Purchase a limited-pay life insurance. Depending on how long you’ve had the annuity, you can purchase a 7-pay, 10-pay, or 20-pay life insurance policy. The policy will be guaranteed as long as the policy is funded.
    • Note: A full medical underwriting process might be required.
  2. Contact the annuity company, and setup systematic withdrawals to fund the life insurance policy.

Annuity/Life Insurance Policy

This hybrid plan is a combination of an immediate annuity and permanent life insurance policy. If approved, the tax-free death benefit is guaranteed for life, starting Day 1.

  1. Direct Transfer or 1035 Exchange your current annuity into hybrid plan so there is not a taxable event.
    • Both nonqualified and qualified annuities (IRA annuity) are accepted.
  2. Once the plan is issued, the insurance company will distribute equal installments from the annuity portion of the plan into the life insurance policy’s cash value for a set length of time (period certain). Once the annuity has exhausted all of the distributions, the hybrid plan converts into a paid-up life insurance policy.
    • Generally there is limited medical underwriting involved. Primarily a telephone interview, medical background check, and a prescription drug history review.
    • These hybrid plans are designed for older clients, issuing up to age 85.
    • Note: All owners will report annuity distributions as income to the IRS each year until the annuity has been exhausted.

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.

Nonqualified Annuities

Systematic withdrawals from a nonqualified 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 Nonqualified 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 gain that is taxable. For each SPIA payout, your client will receive a 1099 form from the company stating the taxable portion. The company 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 fully 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
Male$86,605$76,979$69,279$61,209
Female$98,963$86,605$78,055$66,675

When considering these sample rates, understand the $50,000 has not been taxed yet. What would the $50k be worth after federal and state income taxes are taken out. After you’ve taken this reduction into account, compare it to the tax-free sample rates above.

What Annuities Can Not Be Replaced?

Find out If Trading Your Annuity For life Insurance Makes Sense

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Why you can trust The Annuity Expert

At The Annuity Expert, we strive to help you make confident financial decisions regarding annuities. Content provided is created by an independent licensed financial professional.

The Annuity Expert is an online insurance agency that provides the widest variety of annuities in the United States. When you buy an annuity directly from us, we receive a predetermined commission from the insurance company (not you). While your annuity is active, clients are not charged any servicing or management fees. Learn more.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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