What is a 1035 exchange and how does it work with life insurance?
Answered by 5 licensed agents
A 1035 exchange is in Part 72 of the IRS tax code. It allows you to move money from one policy to another like policy with no tax consequence. Speak with a qualified broker who can help explain this to make sure you have no problems.
A 1035 Exchange is the tax code provision which permits a life insurance contarct with cash value or an annuity with cash in it to be replaced by another more client suited contract without the client realizing a taxable gain from the cash in the contract being replaced. the old contract is replaced seamlessly by the new contract without the owner realizing a tax gain.
A 1035 Exchange refers to clause or provision in the IRS Code, Sec 1035, that allows someone to replace one life insurance policy or annuity with another without triggering a taxable event. So, exchange a life insurance policy for another life policy, or a Life insurance policy for and annuity.
In essence, you can swap one policy for another or defer any capital gains or income tax that would otherwise result from surrendering the original policy.
A 1035 exchange lets you move the cash value from an old life insurance policy into a new policy without cashing it out, and creating an immediate tax bill. A 1035 exchange can be a smart way to reposition old cash value, but it should only be done when the new policy clearly solves a problem better than the old one. We don’t replace a policy just because it’s old. We replace it only if the new policy gives you better protection, better flexibility, or better alignment with your current goals.
Allows you to transfer funds i.e Cash Value of a life insurance policy to another life insurance policy or non-qualified annuity or even a endowment contract. However you may not exchange an annuity for a life insurance policy it would become taxable. In order for it to be considered a 1035 exchange the finds must be a direct transfer between the insurance company's. It can't touch you're bank account.
