The UIL tracks with the S&P and has a 0% low limit and a 10% max yearly gain. The company is Farm Bureau Life for the UIL. I lose about 20k in loading fees to transfe
This is a great question! Of course, the first part of the answer is: we need a good deal more information to answer this with actionable advice. However, I'd be happy to give you a high level response.
In general, if you invested with a high quality whole life carrier (ie MassMutual, NY Life, etc), I would tend to keep this. You've already invested quite a bit into it and all the commissions, fees have already been paid. If you're far enough into it, you could have the dividends start paying all or part of the premiums if you no longer wish to continue funding it.. but it is the one piece of your insurance portfolio that will last for life.
With regard to IULs and if you should purchase a new policy, this is going to depend on quite a few factors: your age, your health, your estate tax situation, how much planning has already been done, etc.
I have advised some clients to purchase IULs, but typically only when there was another advisor (accountant, attorney) that is not as educated on the full "costs" of these programs. On the surface, they sound almost too good to be true: all upside, no downside, PERFECT! In 90% of them, it is too good to be true. Keep in mind, the 10% number can be adjusted down at any time if the insurer experiences heavy losses or their portfolio isn't doing as well as they'd like. So your 0-10% spread could be easily lowered to 0-4%... At the same time, they can also raise their COI (cost of insurance) which can change each year. So while they're crediting less to your account, they could also be charging you higher premiums inside the contract for the insurance. This can get into a nasty situation where insurers demand higher premiums in later years... long after you had seen an illustration that showed you premiums going to zero after X years.
IULs are somewhat newer to the arena and haven't really been through large market cycles in their current form... so we haven't seen many issues/complaints against them yet... but those are coming.
There are other options for you if you do not wish to keep the whole life contract. Of course, I'd be happy to discuss further offline. Feel free to email or call me any time.
Jared N. Larsen, CFP®, AIF®
Highlands Advisors, LLC
(212) 776-1475 (Office) JLarsen@HighlandsAdvisors.com
What are you hoping to accomplish with a 1035? Do you want higher returns in the form of interest or index credits? Are you looking to add features like lifetime access to the death benefit for chronic illness care cost reimbursement? How would you react to fluctuating interest credits in an IUL compared to your experience with the whole life policy? A replacement review should work through these types of questions and more, including a cost comparison, and it should document how the new policy will put you in a better position than the old policy.
Things that you said make me think that you should look further before making a final decision. I can't say which company and policy meet your needs without a better understanding of your objectives, but I do think that there are better policy features available through an independent agent.
There are policies that don't have the $20k loading expense you mention. There are also policies that have index caps in the 11.5% to 13% range for annual point to point index options based on the US stock market. I'd also look for a policy that offers access to the policy death benefit while you're alive in case you get a critical illness like heart disease, a chronic illness that needs long-term care, or a terminal illness where the money might pay for experimental health care or for bucket list experiences. These policies can be a bit like a Swiss Army knife (sorry Victorinox) if you get the right features.
This may mean comparing three or four companies. The agent should be able to do most of this work for you, but he or she should also help you understand how each helps you answers the type of questions posed in my first paragraph.
Shop around for the best IUL available with your age, health and state of residency. Floors / ceilings vary from product-to-product, carrier-to-carrier.
One of the many IUL products I work with has a ceiling of 15% and a floor of 0.75% with an available 2% fixed account to shift to during economic downturns. Other products with other carriers have even higher ceilings, and a few with no ceilings at all, if you choose to give up a few percentage points during the dark times. And some of them have other living benefit features that have only recently been introduced to the industry.
And a completely unmentioned product is the VUL or Variable Universal Life policy. Therein you have access to not just indexes, like the S&P you mentioned, but utilize mutual fund-like vehicles that are managed by the big names and sector funds for very specific focus. These strategies are only available for purchase from a securities-licensed, life insurance agent.
And of a special appeal to you might be a blended policy. These products allow you to set up the permanent UL (indexed or variable) face value that allows accrual in your cash account, with an additional term or tapering term policy built-in as a rider. When combined, you get the growth of the UL with the value of a term policy in one.
The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on the original contract. This can be a substantial benefit. Because this is governed by Section 1035 of the Internal Revenue Code, these are called "1035 Exchanges."
But this benefit comes with some important strings.
The tax code says that the old insurance policy must be exchanged for a new policy - you cannot receive a check and apply the proceeds to the purchase of a new insurance policy. The tax code also says that you can make a tax-free exchange from: 1) a life insurance policy to another life insurance policy or 2) a life insurance policy to an annuity. You cannot, however, exchange an annuity contract for a life insurance policy. A transaction in which a new insurance or annuity contract is to be purchased using all or a portion of the proceeds of an existing life insurance or annuity contract is referred to as a "replacement." A 1035 Exchange is a type of replacement transaction. Although the term "1035 Exchange" is often used to describe any form of replacement activity, technically not all replacements are Section 1035 Exchanges and as a consequence are not tax-free.
Rather than first think about the 1035 into some other product that you may or may not want, the primary question is whether a 1035 is necessary. If not, you can acquire whatever suits you best without relinquishing the cash up front. The first question that should be asked by an advisor (as opposed to a salesperson) is what is your cost basis in the life insurance. In other words, how much have you paid in premiums?
Then you can freely decide if you need or desire more life insurance. If your gain is non-existent or minimal, and you do not need or desire additional life insurance - then you can just cash in that policy, and then invest the principal for yourself, your children or grandchildren. If you prioritize a fiduciary type response, feel free to reach out to me.