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Understanding the 1035 Exchange

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When you first buy a life insurance policy, it’s ideally suited to your life and goals at the time you purchase it. Over the years, during annual insurance reviews, you can make changes and adjustments to help bring your policy up to speed with the changes in your life and priorities. However, there can come a time when a policy simply doesn’t suit your needs anymore, and that’s the time when you need to consider a 1035 exchange.

What Is a 1035 Exchange?

IRS code section 1035 states that insurance policyholders with cash value in their life insurance policy can exchange that policy for another without suffering any tax consequences as long as they are exchanging the policy for an equivalent and there isn’t going to be a change of policyholder.

If you were to surrender your life policy instead of doing a 1035 exchange, even if you used the check for the surrender value to pay premiums on your new policy, you would be taxed for the transaction. But when you exchange the policy through a 1035 exchange, you can put the old policy’s cash surrender value into the new policy without paying taxes.* You can even put the money into a hybrid policy that provides long-term care benefits.

1035 Exchanges and Annuities

A 1035 exchange doesn’t just allow you to exchange one life policy for another without tax consequences. It also allows you to exchange a life insurance policy for an annuity. When you do this, you can use the cash values in your existing policy to purchase an annuity that can be designed to offer you a guaranteed, lifetime income as well as complete protection of your principal from downturns in the market. You can even design the annuity to have long-term care and survivor benefits.

The 1035 exchange gives you tremendous flexibility to create the policies and contracts you need to support the lifestyle and goals you have today. It’s a valuable process that can give you an up-to-date portfolio and complete protection during your retirement years.

*Taxes may be due if the face amount on the new policy is much lower than the old, in which case you may have a modified endowment contract (MEC).

#1035 #lifeinsurance #exchanges #annuities

Author: Dennis M. Postema

Video Production: Adam Grillot


About Dennis M. Postema

Dennis M. Postema, RFC, is a successful entrepreneur, best-selling author, coach, speaker and registered financial consultant. He is the founder of MotivationandSuccess.com, StoriesofPerseverance.org, FinancingYourLife.com and TheRetirementInstitute.org.

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