What is a 1035 exchange and how does it work with life insurance?
Answered by 4 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 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.
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.
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.
