Action Memo

Hidden Strategy to Upgrade Your

Annuity or Life Insurance...
Tax Free
By Ronald Gelok

!
The Ronald Gelok & Associates Action Memo Series
Complementary Educational Material
Offering No Cost, No Obligation Analysis of Your Personal Situation.

Ronald Gelok & Associates

2001 Route 46 East, Suite 511

Parsippany, New Jersey 07054
(800)467-8152
www.RonaldGelok.com

How to Exchange Your Annuity or Life Insurance Policy--Tax Free

Action Memo
Hidden Strategy to Upgrade Your Annuity or
Life Insurance...
Tax-Free

In this Action Memo You Will Discover:

How you can exchange certain insurance policies and annuities

Why you ought to do it
What difference it makes in your financial future
What are some of the pitfalls that you might want to look at
before you exchange

It takes only a few minutes to read this Action Memo and learn
whether a 1035 Exchange might help you:
1.
2.
3.
4.

Create a lifelong stream of tax-free income

Increase the income from your annuities
Lower the cost of your life insurance premium
Raise the death benefit to your heirs without raising the
premium
5. Move from volatile investing to guaranteed investing
6. Get a firm grip on the tax basis of your annuity holdings
Imagine if you kept a certificate of deposit for 25 years regardless of
how low the interest rate, because you just did not know they could
move the money. Today, there are literally millions of consumers in
the United States with annuities or life insurance policies who do not
know they can better their position, tax-free, through a properly
structured Section 1035 Exchange.
If you are one of them, you are about to have an ah ha
moment! Read on...

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

What is a 1035 Exchange?
A 1035 Exchange is named, as you might expect, after
Section 1035 of the Internal Revenue Code, which allows
for certain like kind exchanges of property with no
taxable gain or loss to you. There are similar sections in
the code, for example Section 1031 allows for exchanges
of real estate, for one piece of property to another. But,
Section 1035 deals specifically with insurance products such as
annuities or life insurance (considered like kind) and talks about the
rules that one follows in doing a tax-free exchange of those products.
You cannot exchange just any insurance policy for any other
one or any annuity for just any other.
What exchanges can you make?
You can go from:

A variable annuity to a fixed annuity

A variable annuity to a fixed indexed annuity,
A traditional fixed annuity to a fixed index annuity
A life insurance policy to another life insurance policy
A life insurance policy with cash value to an annuity
But, be aware, you cannot simply move from an annuity to
a life policy on a tax-free exchange basis.

Definitions: Read these definitions and you will learn what the above
refers to. You will also learn whether you have any of them. The
language of personal finance is sometimes so hard to understand that
you do not even know whether you have an asset or not.
Lets fix that now.

A variable annuity- A contract with an insurance company that

provides payments which vary depending upon the investment
success of a separate investment account. Because the invested
funds primarily follow an equity-based index, this annuity offers
greater potential rewards and greater attendant risks than
annuities supported by fixed-income securities. Paraphrased
from: Wall Street Words: An A to Z Guide to Investment Terms
for Today's Investor by David L. Scott. Copyright 2003 by
Houghton Mifflin Company.

Ronald Gelok & Associates

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

A fixed annuity- A contract with an insurance company that

guarantees a stream of unchanging payments for a specific
period or for an individual's lifetime, depending on the terms of
the annuity contract. Paraphrased from: Wall Street Words: An
A to Z Guide to Investment Terms for Today's Investor by David
L. Scott. Copyright 2003 by Houghton Mifflin Company.

A fixed indexed annuity- A special class of annuities that

yields returns on your contributions based on a specified equitybased index, but with a guaranteed minimum return, so even if
the stock index does poorly, the annuitant will have some of his
downside risk of loss limited. However, even in a bull market
annuitant's yields will be somewhat lower than a stock index due
to the combination of caps on the maximum amount of interest
earned and fee-related deductions. Paraphrased from:
Investopedia

Cash value in an insurance policy- A type of life insurance

policy that pays out upon the policyholder's death, and also
accumulates value during the policyholder's lifetime. The
policyholder can use the cash value as a tax-sheltered
investment (the interest and earnings on the policy are not
taxable), as a fund from which to borrow and as a means to pay
policy premiums later in life, or they can pass it on to their heirs.
Whole life, variable life and universal life are all types of cashvalue life insurance. From: Investopedia

Under the 1035 rules the ownership has to go like-to-like to

make any approved exchange.
You cannot exchange a policy owned by your
spouse for one owned by you, or vice versa. The
ownership has to maintain as the same.
In short, so long as the owners are the same, life
insurance policies can be exchanged and an
insurance policy with cash value could also be
exchanged for an annuity, but you can't go the
other way - not an annuity for a life policy.

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

Action alert: Fill out this chart:
Whether You Make an Exchange or Not
You Should Know this Information
Do You Own...

What is its
Present Value

By How Much
Does it Grow
Annually

Fees

Variable
Annuity
Fixed
Annuity
Fixed Index
Annuity
Cash Value
Life Insurance
Action Alert: If you are not sure about these, we will do an
analysis for you. Contact us at 973-917-4556.
What is the benefit of exchanging a life policy or an annuity?
Here are 6 ways your position may be improved by a like-kind
exchange:
#1. You can get more death benefit for less or the same
premium
Real Life Example: We had a client who had a life policy for $1
million which she bought to leave to her son. We analyzed her
premium and found that if we did a tax-free exchange of the old policy
to a new policy for the same outlay ($20,000 per year), she would
have $1.340 million of death benefit, instead of the $1 million death
benefit, a $340,000 gain to her children down the road just by doing
this tax-free exchange, with no additional out of pocket expense to
her.
Action Alert: If your goal is leaving a legacy, and you bought your
policies a while ago, have them looked at to see whether you can do
even better for your family. Contact Us at 973-917-4556.
Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

#2. You can reduce insurance premiums
Policies that were issued years ago were issued on the basis of
mortality tables where the actuaries were assuming shorter life
expectancies, and so the cost of insurance was more. Now, with the
newer tables where life expectancy is longer and cost of insurance is
often less, you can sometimes make dramatic improvements in the
death benefit your family receives.
You may also be able to lower the premium and get the same death
benefit. A tax-free exchange may lower the cost of insurance.
#3. You can reduce annuity fees
Real Life Example: A client had an annuity that was beyond the
surrender charge period (many annuities charge a fee if you liquidate
before a certain date called a surrender charge). We discovered that
he was paying fees he did not know even existed like: mortality and
expense factor charges, rider costs, administrative expenses, and fees
on the various sub-accounts.
It was shocking. We often find people are paying 3.5% per year or
more. In his case we found that he was paying over $35,000 a year.
And I said, "Do you realize what you're paying on this over a 10-year
period?" Needless to say, he was shocked, too.
So if our objective is to lower costs, an exchange may be the correct
move. Keep in mind one disadvantage of doing a tax-free exchange
from an older annuity to a newer annuity is that the newer annuity
may have a new surrender charge period, which means, during the
next seven to ten years, you would be penalized if you withdraw more
than 10% of the annuity value in a given year.

Are you overpaying?

Go back to your chart and write yes or no next to each product you
own under the heading FEES. If you do not know how much you are
paying in fees, we will give you an analysis. We will do our hidden fee
analysis for your mutual fund portfolio as well. Just contact us at
973-917-4556.

Ronald Gelok & Associates

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

#4. You can protect your variable annuity against loss.
The value of your accounts can go down in variable annuities. In 2008
you would have to make 67% to make up for your losses.

!
And such corrections take place about every 8 years.

!
To protect your annuity money against loss it may be appropriate to
upgrade or do a tax-free exchange to a fixed annuity or perhaps a
fixed annuity that offers index linked interest.
Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

Real Life Example: An older lady was in the office last week. Do not
ask me how this happened, but an advisor recommended a totally, in
my view, inappropriate variable annuity that put her money at risk in
mutual fund-like sub-accounts where her money is subject to going
backwards. Now the last thing this nice lady wants is an annuity
where her money can go backwards.
Her particular need is for additional income, so to correct this problem
we recommended a tax-free exchange of her variable annuity to a
fixed annuity that offers index linked interest with a lifetime income
guarantee.

Here is the most important part:

The account will never go backwards even when the
market goes backwards.

At her age, if she does this exchange and starts to take the income a
year from now, the lifetime income stream guaranteed is in excess of
7% of the amount being exchanged per year, every year for the rest of
her life, whether she lives to 92 or 102.
Your balance is not subject to the vicissitudes of the stock market and
all of that volatility. It is solely up to you whether or not you want to
make withdrawals in excess of earnings. So if your mindset is to
withdraw no more than what you are actually earning each year, you
can do that. If you want to withdraw a little more than that, knowing
that you never exhaust the income stream that is an option for you
too.

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

# 5. You can create a lifelong stream of income.
Many times older adults want a lifelong stream of
income that makes them secure. They are sold an
immediate annuity. With an immediate annuity you are
trading your lump sum for a stream of payments and
you are giving up control. I am not fond of that concept of loss of
control, and I think you are not either.
If you already have an annuity, a far better approach could be a taxfree exchange to a company that offers a guaranteed lifetime income
stream at an attractive rate, maybe 5%, 6%, even 7%, as we
discussed above.
We do not want you giving up control over your nest egg. We want
that lump sum staying intact and ultimately passing on to surviving
spouse or to children or grandchildren. Since we are moving towards
a pensionless society, we must create a pension-like guaranteed
income for ourselves. We use lifelong income annuities.
#6. Increase the earning potential of the cash value of your life
insurance policy.
If you have an existing dividend paying whole life policy which you
bought years ago, and the dividend projections that the insurance
company used when you purchased were much higher than what is
being used today, you may be very disappointed as what you are
earning. Oftentimes a tax-free exchange of that cash value into
something that makes a lot more sense for you in terms of earnings
potential, whether a different policy or an annuity, will fix the problem.
Action Alert: Let us design a lifelong income tax-free strategy for
you. It starts with education. Take our 12 webinar series free course.
Register: www.ronaldgelok.com

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

!
Frequently Asked Questions:
Can I just surrender a policy or an annuity and buy a new one?
Surrender and re-buy is a taxable event. You will get a surprise with a
1099 and a tax liability.
If any of the 6 Benefits seem good to you, contact us and we will give
you an analysis and guide you through a decision. If you decide on an
exchange we will implement the exchange for you so it is tax-free.
Can I make a partial 1035 exchange?
Some companies will allow for partial exchanges and others will not.
Section 1035 of the tax code allows for partial exchanges, but not
every insurance company allows for it.
Action Alert: We will research whether your policy or annuity can
have a partial exchange free of charge for you. Contact 973-917-4556
Can I make changes in the beneficiaries when I make an
exchange?
You are free to change beneficiary designations either before or after
the exchange unless you have selected an irrevocable beneficiary
designation.
Real Life Example: I had a lady in the office not too long ago that
was in poor health. She worried that if her husband remarries a new
spouse might influence him to change the beneficiary designations on
her annuity. I pointed out she has the option to make the beneficiary
designation irrevocable.

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

Will I have a change in cost basis after I make an exchange?
You will not have a change in cost basis after a 1035 exchange if you
do it right.
Cost basis is the amount you paid for an investment minus certain
fees. With the 1035 exchange your original cost basis follows you. The
paper work tells you what the IRS considers the cost basis. So if you
liquidate and make a profit you know exactly how much tax you will
pay.
Real Life Example: A client put $100,000 in an annuity many years
ago, by now it had quadrupled in value. Somebody is going to be
paying the income tax liability on the tax deferred gain.
So what often sadly happens is the annuity owner will pass away and
leave the annuity to a son or daughter. The son or daughter submits a
claim form, gets the money all at once, and incurs the tax liability all
at once. Whereas, if they had done tax planning they could have
chosen from a variety of better settlement options. For example, they
could take the annuity out over 5 years and spread the tax liability.
If I have a loan against an insurance policy can I still do a 1035
exchange?
There are some insurance companies that allow you to carry over the
loan balance to the new policy, and there are others that will not offer
the exchange.
Action Alert: If you have a policy with a loan, we can help you find
the right company with which to exchange. Contact xxxx
If you do not have a loan, maybe you should have. Many people
have a loan against the value of their policy because they created a
strategy to draw tax-free lifelong income from their policy. We create
and implement such strategies for our clients.
If you are interested in participating in the stock market with
guarantees against loss, and creating a guaranteed, lifelong, income
tax-free pay check for yourself, we will educate you. Check out
www.ronaldgelok.com home page for a brief video on the process, and
better yet, download our 12 part complementary webinar series!
Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

A word from Ronald Gelok

Dear Reader,
If you have read this far in the Action Memo, you are interested
in taking care of business. Perhaps you want us to help you
decide on an exchange.
But, I want to make one point first. Please take a holistic
approach to your overall situation. We want to find out what
your hopes are, what your dreams are, what is important to
you as it relates to yourself, your children and grandchildren;
your overall quality of life in retirement.
That is why I have written the book, Beating the F.E.A.R.
Factor: 15 Minutes to Your Ideal Retirement, WealthBuilder
Press.
I give a free copy of this book to each and every person that
has a consultation with our office. You will find my bio and all
the States in which I am licensed on the last page of this Action
Memo. If you cannot make it into the office we do our
consultations by video conferencing from any computer or cell
phone too.
Are you helping a parent or older adult with finances?
Many times the owner of an insurance policy or an annuity is an
older person, and a child or guardian is helping them with
finances. The older adult cannot come into the office. That is
another reason we hold video conferences. You can be with us
and your loved one can participate from home. We can set up a
remote conference, even if they (or you) are not computer
savvy.
I love to educate, but lets face it, a webinar, Action Memo,
even a full length book, is almost like trying to give a haircut
Ronald Gelok & Associates

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

over the phone. That's why I would encourage you to register
for one of our complementary consultations not just on 1035
exchanges, but on additional topics of importance to you.
I don't want you to find out too late that what you didnt know
ended up costing you money."
Yours,
Ronald Gelok

P.S. Here is a caveat: Watch out for so-called advisors that

suggest a 1035 Tax-Free Exchange just to generate fees for
themselves.
Real Life Example: I had somebody come into the office that had an
existing annuity account that was only a year old. It had a 9%
surrender charge.
Now, I was shocked to hear that they had recently talked to another
advisor who had recommended that they do a tax-free exchange of
this annuity to a new annuity. In my mind this made no sense
because the surrender charge was too large.
Of course, you do not have to be held hostage to the surrender charge
schedule of your existing annuity. Let's say you have had an annuity
for seven or eight years. There's a 2% or 3% surrender charge, and
we can find you a company that has bonus interest and a host of other
benefits that would more than offset that surrender charge. That
could be an appropriate tax-free exchange. But, unfortunately, there
are some advisors recommending inappropriate exchanges where you
might end up going from a product with low fees or no fees to a
product that incurs substantial fees.

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

The Last Word...
Our objective is to make planning your future easy
and simple. Maybe you think it is strange to use the
word fun, but sometimes even fun because the
whole objective for our interaction is that people
come away breathing a sigh of relief saying, "You
know what?
I understand this so much better now." An often
heard comment that I get is, "How come nobody
ever explained this properly to me before?" And the
answer unfortunately is, "I don't know, but we're
doing it right.

About Ronald Gelok:

Ronald (Ron) Gelok is President of Ronald Gelok & Associates. He is an
active member of the Financial Planning Association with over 20 years
of financial services experience.
Ron is a licensed New Jersey attorney and a member of the Elder Law
and Real Property, Probate & Trust sections of the New Jersey State
Bar Association. Much sought after as a speaker, Mr. Gelok has
appeared on radio and television discussing a host of financial planning
issues.
Ron is known for making complex retirement planning issues clear and
easy to understand. His clients often find that, after working with him,
they have moved significantly forward in their planning, simplifying
their finances.

Ronald Gelok & Associates

Action Memo

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How to Exchange Your Annuity or Life Insurance Policy--Tax Free

Ronald Gelok & Associates

2001 Route 46 East, Suite 511
Parsippany, NJ 07054
(800)467-8152
info@ronaldgelok.com
www.ronaldgelok.com
Hear Our 12 Part Webinar Series:
F.E.A.R. Factor--15 Minutes to Your Ideal Retirement

Take the Portfolio Stress Tests

Discover the Hidden Fees in Your Portfolio
Have Ron hold a seminar for your group

WOW-Women of the World Club

Call (800)467-8152
Ron's Latest Book:
F.E.A.R. 15 Minutes to Your Ideal Retirement

Ronald Gelok & Associates

Action Memo

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