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TECHNICAL life insurance 1035 and valuation question?

I am an attorney. My client has a life policy, from 1995, with about $65k of cash value. It's with a high rated company and is a 90/10 blend of term/whole life. I therefore assume the terminal interpolated reserve, for gifting purposes, is about $65k. Client wants to "devalue" the policy before making a gift of the policy. Reading in Consumers Reports (or some such pub) I noticed that term rates have gone down drastically in the last 10 years due to mortality changes and I thus assume whole life have to. Could policy owner do a 1035 to a new policy, thereby reducing the cash value, and then gift the policy this year or next? That is, would the terminal interpolated reserve be much less than $65k at that time since the new policy would use the cash and therefore have a very low cash value? Second question, is this a stupid idea?

Public Comments

1. I'm amazed that a 90/10 taken out in 1995 has that much cash value ....... are you absolutely certain of this? To answer your question, yes, your client COULD do this, but why would he or she WANT to? If s/he wants to "gift" the policy, just go ahead and "gift" it by changing the beneficiary, making the designation irrevocable. Taking out a new policy will involve a higher rate due to age and any change in health status. If an agent has suggested your client do this, it's highly probable he or she just wants the commission.
2. I don't know if you know how 1035 exchanges work. A 1035 exchange moves the cash value from one life insurance product into another life insurance or variable annuity product. There is no limit on how much cash value can be moved and the client will never pay taxes on it during the exchange. I tell my clients who has cash value life insurance to move the cash value into a variable annuity. The client doesn't have to move all of it. If they want to move the cash value into some other accounts such as their savings or IRA, they can. Since your client want to give some of the cash value as a "gift" to someone, they can. Just that, they will pay income taxes on this portion of the withdrawal. Remember, the client can only give up to $11,000 to a child. But before I do all this, I need to know if the client still want life insurance. If they do, I would sell them term insurance. See if they qualify for term insurance (clients have to go through the underwriting process). After the policy is approved and the client accept it, I would then do the 1035 exchange.