How to Roll Insurance Policies
Sometimes people invest in a life insurance product only to later find one that fits their needs better. Insurance companies create new policies continually in an effort to capture their market share of business. Each one has features the old products didn't have. If you've had the policy for a long time and cash it out, there's a taxable incident on any growth. In order to avoid this, you can roll an insurance policy into the new policy.
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Instructions
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Decide whether it's appropriate to roll the policy using a 1035 transfer or simply cash out the life policy. If you have no taxable growth on the policy, which means you paid more in premium than you have in cash value, often simply cashing out the policy is best. Do not do this unless you have another policy in hand. You might not qualify for new insurance.
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Find the right policy for your situation. If you have an insurance agent helping you, the transfer is often easier because he understands the paperwork for his company.
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Apply for the new policy. In order to roll an insurance policy, you have to have something to roll it into and that's another insurance policy or an annuity. If you select an annuity, you simply include the appropriate paperwork. If you select another insurance policy, you need to follow additional steps.
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Use section 1035 paperwork to make the transfer to the new policy. Normally companies include it with the application, but don't take any action on the transfer until they approve the policy. If you want to roll an insurance policy into an existing universal product, you simply need to fill out the appropriate section 1035 form.
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Continue to pay your insurance premium until you receive word that the company issued the new policy. If you allow the old policy to lapse or take a loan from the cash value to pay the premium, you may have a problem. If the other company finds a medical condition that did not exist when you bought the original policy, you might not have insurance to roll the policy into. If there's a loan on the policy, you must replace the funds or the government considers the loan "boot" (taxable as ordinary income) if the insurance companies won't transfer the loan balance. That means it's taxable because in essence you've taken constructive receipt and benefited by the cancellation of the loan.
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Roll more than one policy into your new one. If you wish to combine several small policies into a larger one, often you find that it makes financial sense. This happens for two reasons. One is because each policy has a policy fee. On smaller policies it can cost almost as much as the insurance. The second is because insurance per thousand is cheaper the more you purchase. A larger policy gets this discount.
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