Advanced Underwriting Consultants

Question of the Day – June 13

Ask the Experts!

Here’s the question of the day.

Question:  My client owns a MEC life insurance policy that she wants to exchange for an immediate annuity.  What are the tax consequences of doing so?

Answer:  The exchange of a life contract for an annuity is tax-free under Code Section 1035.  That’s true whether it’s a “regular” life contract being traded for an annuity or a MEC that’s being traded.

If a MEC is traded for a SPIA, there’s no tax recognition at the time of transfer.  Each of the SPIA payments will each be partly a recovery of basis (based on the basis from the MEC life policy) and partly ordinary income.

The ordinary income portion of the payments will also be subject to the 10% penalty tax if the taxpayer is younger than 59 ½ and if the SPIA payout period is for a duration shorter than the taxpayer’s life expectancy.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.