What Is a 1035 Transfer?
Hey, everyone out there! I'm glad you joined me for this blog on what is a 1035 transfer. My name is Stan The Annuity Man, and I'm America's annuity agent and the number one annuity educator on the planet. I sell annuities, but I'd like to educate my clients before they buy them.
1035 Transfer Basics
Let's give a quick answer on what a 1035 transfer is. A 1035 transfer is when you transfer from one annuity to another. The number 1035, which you're going, why 1035, Stan? 1035 is actually the IRS code. If you have no life and just want to pull up the IRS code, pull up section 1035, which covers annuity to annuity life insurance to life insurance transfer. With that being said, hang in there. I'm going to tell you a lot more and how to dig in further so you can fully understand what a 1035 transfer is. So here we go.
Many people get 1035 transfers mixed up with 1031 transfers. You go, Stan, 1035, 1031. What are you doing? You got to understand what's going on out there. 1031 is real estate, real estate to real estate. IRS code, read that too. But 1035 is about moving one annuity to another. We'll talk about annuities instead of life insurance because it also applies there. Still, there's a lot more to it than just transferring an annuity to another. 1035 means that the IRS approves that transfer. It's a non-taxable event. It doesn't trigger any taxes, which is a good thing.
I'll give you an example. Here's a story that happened recently. A person called me up, and they said, "Hey, I've had this annuity for 10 years. It was a crap annuity. I won't mention the type, and I really just want to transfer it to something very, very simple. Can I do that?" The answer is yes. Before we could do that, though, I needed to know what he owned, what he had, and if it was transferable. The question you're going to ask is, "What do you mean if it's transferrable? Aren't all annuities transferrable under the 1035 clause?" Technically yes, but the annuity industry is trying to prevent that. You'd call it flipping or churning or twisting. In other words, agents move annuities around to create a commission.
Now there are governors in place, not actual governors of states, but guardrails in place so that you can only do that if it's in the client's best interest. The best way to say it is if you do a side-by-side transfer of the annuity that you're going from to the annuity that you're going to, it has to be in the mathematical favor of the client, not the agent. And so, let's look at what that means on paper.
Let's look at the visual of how a 1035 might not work or how it would work. Here's the one recent call I had with a client. He bought a Variable Annuity with an Income Rider. There is nothing wrong with that product, but here's how a Variable Annuity with an Income Rider works. In other words, it's a Variable Annuity. It has mutual funds, they call them separate accounts, and then it has what's called an Income Rider on it. Two separate calculations. Now, here was the problem. The mutual fund side was $500,000. The Income Rider's side had grown to $750,000. So, when he said to me, "Can I do a 1035 transfer to another annuity?" My answer was no and let me tell you why. Because the Income Rider is not transferrable under 1035 rules. The 1035 transfer rule says only the accumulation value is transferrable. The Income Rider is not; you're leaving that on the table.
If you say, "Stan The Annuity Man, we want to do business with you. We want you to be the agent," which is a good choice by the way, I have to fill out a side-by-side comparison of the annuity that you own and the annuity that you're going into. Now, the problem in this situation, it's not a problem. It's just reality, and it's actually good. This part doesn't transfer. There's no way that there's an annuity that will provide day one the benefits you can get in the annuity if you're staying. That's a good thing. When people say they hate annuities, they really don't understand what the industry has done to prevent bad situations from happening, churning, twisting, and flipping from one annuity to another.
The Walkaway Amount
If an agent tried to fill out the form to go to another annuity and sent that application in, every single carrier out there would spit it back and say, "Not approved." I guarantee you that they do not want people leaving that benefit on the table because that's what you'd be doing. So, you got to say, "Well, why did they do that?" Well, think logically for a second. If you're an annuity company and you have an Income Rider, most of the time, the Income Rider benefit is typically not all the time, but typically is going to be higher than what I call the walkaway amount. Why do they do that? They do that for a couple of reasons.
Number one, well, let's look at the positive. Number one, this is an excellent benefit if you want future income because that's where you're going to draw from, the higher of the two. But number two, this Income Rider has a fee on it. And that fee is for the life of the policy, which comes out of the accumulation value for the life of the policy, which is why annuity companies have the big buildings and logos on the plane. But here's the main reason, and I can never prove it, but if I'm an annuity company, I'd do this. You can't transfer it. In other words, in order to access the benefit of that higher dollar amount, you've got to stay in the policy. You've got to stay with that company, and you've got to turn on that income stream to access that higher dollar amount, which is a good thing for the carrier and a good thing for you if you need lifetime income. You should have never put the Income Rider on there if you didn't need lifetime income. But it's suitable for both parties, but the annuity company gets to keep your money and then give it back to you as principal plus interest, lifetime income stream. But they get to hold onto the bulk of it as they're paying you that lifetime income stream. That's the reality of 1035 exchanges.
MYGA to SPIA
Let's look at another example of how it will work. A guy called me the other day, and he had a fixed-rate annuity, like a MYGA, and he had it for a long time. And he said, "I want a 1035 transfer for a lifetime income stream." I said, "Well, when do you want the lifetime income stream?" Because remember, there are only two questions you have got to answer. What do you want the money to contractually do, and when do you want those contractual guarantees to start? Well, his answer was, "I need a lifetime income, and I want to start immediately." So, he needs an Immediate Annuity.
So, he has this MYGA. Remember what MYGA stands for, everybody. Fixed-Rate Annuity, Multi-Year Guaranteed Annuity, and he wants to go to an Immediate Annuity. But what has to happen before that's approved? Annuity companies, just looking at this, this is great. This is an easy one—a 1035 transfer. You're going from a Fixed-Rate Annuity, like a CD, to a lifetime income stream annuity. It's good for the client and beneficial to the client; it's going to make sense. But before that happens, here's what has to happen legally. We have to go to this MYGA company that he's currently at and run an internal SPIA quote at that company. That's what we have to do. We must ensure that when we run the SPIA quote here for him using our SPIA calculator, it's higher than that company that he's currently at is providing.
When It Makes Sense
Let's look at both scenarios. Let's say we ran the SPIA quote, and it's $3,000 a month. And we ran the SPIA quote, same parameters at the MYGA company he's currently at, and it came back at $3084 a month. He's got to stay. It's bad news for the agent because the agent doesn't get paid the commission, but who gives a rip? It's not about the agent. It's about you. Now, do I get paid commissions? Of course. It's a net transaction coming from the reserves of the carrier. That's not the point. The point is you have to shop all carriers because annuities are commodity-type products. In order for this 1035 exchange to make sense, let's say under the same scenario, his annuity came back at $384, and our annuity came back at $3,200. Then the 1035 exchange happens because it's in the client's best interest. So, a 1035 exchange, to answer it again, is an IRS-approved section 1035 from annuity-to-annuity company, non-taxable event. But it has to be in your favor to do that.
Okay, before we get to the down and dirty, the end, where we shake hands and wave goodbye, which we will. I've done another video called Best Annuities for Seniors. And I want to leave seniors out of this category, but the bottom line is that senior citizens, however you want to frame it; they have all the money. Senior citizens are a target for annuity sales, which is unfortunate, even though many senior citizens need the contractual guarantees of annuities. In this video, I also went through the good and the bad of annuities and the limitations so that if you consider yourself a senior citizen or you're going in that direction like we all are, you can ensure that you're not going to make a mistake. And you're not going to buy the sizzle; you're going to buy the steaks. With that, make sure you see that video. Take a look at that. Click the subscribe button, and make sure you visit our annuity calculators if you want to see quotes.
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