Sorry for reposting this question. I originally posted it as a reply to an old 2018 thread on IULs so the answers I got were pertaining to the original 2018 topic vs mine.
How do I get out of an IUL policy I purchased 3 years ago from a CFP I since then fired? Trying to undo the mistake without hopefully costing me a fortune. Someone suggested a 1035 conversion to a Vanguard Variable Annuity. Is an annuity actually a good product or just another costly gimmick like IULs? Any other thoughts on how to get rid of an IUL policy with the least amount of $ loss? Thanks very much!September 11, 2019 at 11:52 am MST #245332Andrew MusbachParticipantStatus: Financial Advisor, Small Business OwnerPosts: 39Joined: 10/19/2017
The 1035 exchange to a low cost annuity allows you to preserve the cost basis. For example, if your cost basis was $30k and your policy is now worth $5k, you have a $25k loss. If you cashed out the policy, you would get your $5k back, but wouldn’t get to do anything with the $25k loss you have. If you instead did a 1035 exchange to a VA, you could invest the funds and once the VA reaches $30k in value, you could get out of the VA without any tax consequences because you were able to preserve your original cost basis of $30k.
Depending on the size of the loss, it may not be worth the administrative headache to go through the 1035 and monitor the VA of when to get out.
If you posted more details on the policy, I am sure people would provide more specific thoughts!September 11, 2019 at 12:42 pm MST #245359
Thanks Andrew! The Indexed Universal Life policy is $300K death benefit, with $18K cash value at this time, so $318K total with surrender charges of $6K (not sure yet if there are any additional penalties). I pay in about $4300 per year. It was advertised to me as a “sure way to supplement my retirement income tax free with no loss regardless of the market performance” when I retire at 55 (13 yrs from when it was purchased). According to the illustration I was shown, the “break even” point was going to be at age 55, which is when withdrawals would have started. I also noticed that I could pay a minimum of $1500 annually for the policy not to lapse. Given these details, what’s the smartest path forward? Thanks so much.Andrew MusbachParticipantStatus: Financial Advisor, Small Business OwnerPosts: 39Joined: 10/19/2017
Ask the agent/insurance company:
– How much you would get if you cashed out the policy today after all expenses
– What your cost basis is
Based on your figures, it sounds like it should be $12k that you would get ($18k CV minus the $6k of surrender charges). With you having it for ~3 years, your cost basis is probably ~$12-16k depending on how many payments you’ve made. If that’s the case and you had a $4k loss, I don’t think it would be worth the headache of trying to 1035 it to an annuity to preserve a $4k loss. If you are able to get out of the policy with $12k and only a $4k loss, you can consider it a relatively cheap lesson. Don’t beat yourself up or continue throwing money at something that you know is not right for you.
If you need life insurance and that was part of the reason you had the IUL in the first place then you’ll want to look at term life insurance before cashing out the UIL. You’ll have a significantly cheaper life insurance premium for more coverage (if needed) and then you can invest the rest of your saved $4,300 premiums each year. And hopefully you never have to worry about looking at an insurance “illustration” ever again 🙂