by angelita » Sat Dec 11, 2010 02:17 am
Being a single parent I purchased a VUL for my child almost 20 years ago.
I want to surrender the policy now that he is financially independent but the policy has accumulated investment gains (above cost basis) of $70,000 and I've learned that gains are taxed as ordinary income (not long term capital gain).
Surrendering the policy would create a very unfavorable tax situation for me but I also do not want to keep paying for insurance not needed...
Is there any way to minimize the tax burden in this case ?
... such as changing details of the policy ? or rolling over to another product such as an annuity ?
Please advise
Thank you
I want to surrender the policy now that he is financially independent but the policy has accumulated investment gains (above cost basis) of $70,000 and I've learned that gains are taxed as ordinary income (not long term capital gain).
Surrendering the policy would create a very unfavorable tax situation for me but I also do not want to keep paying for insurance not needed...
Is there any way to minimize the tax burden in this case ?
... such as changing details of the policy ? or rolling over to another product such as an annuity ?
Please advise
Thank you
Posted: Sat Dec 11, 2010 05:19 am Post Subject:
You can do what is known as a 1035 exchange and put the money into an annuity. It can be a fixed or variable annuity. This won't stop the tax issue, but it will delay it.
When you move the money the cost basis will move with you. The money will continue to grow on a tax deferred basis.
Posted: Sun Dec 12, 2010 01:21 am Post Subject:
Is there any way to minimize the tax burden in this case ?
svmsaru is correct. You can DEFER your taxable event by exchanging your contract for an annuity, or perhaps for a long term care policy.
But, then again, if there is as much gain in your contract as you indicate, you could simply stop paying premiums and allow the monthly cost of insurance and other fees/expenses to be taken from cash value.
If you wanted to do that, then you could use the 1035 Exchange to move the cash value into a whole life or universal life policy of the same face amount as your VUL contract. The downside is that you would have to qualify for the new policy, and the premium would be based on your attained age.
Or you could simply move the money into the "guaranteed" fund in your VUL policy, and have the insurance company run an "in-force illustration" for you showing how far into the future the cash accumulation would cover the costs of the contract on a "guaranteed" basis (the worst case scenario in which interest is low and policy expenses are maxed out).
The insurance "may not be needed", but if the money is paid to your beneficiary as the death benefit of the policy, there will be no income tax liability, even if there is "gain."
You can always talk to the insurance company about your options, or to a local agent who represents that company.
And you could "gift" the ownership of policy and its cash value to a charity and claim a charitable contribution deduction for the gain over cost basis. If you did that before 12-31-2010, you could claim it against this year's tax liability. If you wait, Congress might just go through with its plan to eliminate charitable contributions, and then you'd lose the opportunity.
As a last resort, you could really screw things up by reallocating your separate account into the money-losing subaccounts with the intent to wipe out your gains. But I would never recommend that.
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