1035 Exchange to the Rescue [Best Proven Insurance Hack]

702(j) retirement plan

The IRS allows you to exchange a life insurance policy that you own for a new life insurance policy without having to pay any tax on the gain as long as the insured and the owner remain the same on both policies.  This is referred to as a 1035 exchange and can be a huge benefit to you. Maybe your situation has changed, therefore the type of policy you have is no longer needed or perhaps you purchased a policy that is no longer performing the way it was presented to you many years ago.

1035 Exchange to the Rescue

The 1035 tax-free exchange provision that life insurance provides is meant to protect you, the consumer.  I have said it before and I will say it again.  Life insurance policies evolve.  Believe it or not, consumers dictate what life insurance companies offer in their product lineup.  These companies listen and make changes to their products all the time.  It seems that these life insurance products get better every year and companies will follow suit.  We now see chronic illness benefits and critical illness benefits added to most permanent policies these days.  We see capped variable loan rates on indexed universal life insurance policies.  I don’t know of any universal life insurance policies that don’t come with an over loan protection rider.  More and more companies are getting into the indexed universal life insurance space.  Even variable universal life insurance policies are getting better.

But what if you have an old policy that is just average?  Maybe you should consider a 1035 exchange.

There are a few things to know before you consider the exchange.  First of all, the monies from the old policy must transfer directly to the new company.  You cannot physically receive the funds and apply them to the new policy.  IRS code says that you can exchange a life insurance policy for another life insurance policy or for an annuity but you cannot exchange an annuity for a life insurance policy.

We work on 1035 exchanges regularly and can guide you through the process.

Keep in mind that this is life insurance and medical underwriting will be required just like when you purchased the original policy.

Several recent events have created a spike in 1035 exchange or replacement activity.  There have been several major companies that have stopped selling life insurance or raised the insurance rates on inforce policies.  This is a major concern since permanent life insurance policies are meant to provide coverage for 20, 30, 40 and 50 or more years.  If this has happened to you, we can review your policy and help you to find a solution.

What would you do if you purchased a universal life policy 10 years ago only to find that your company is raising your rates.  You will probably look into changing companies.  Many of our new clients are coming to us today because of this issue.  As long as your health is good, you should be fine.  There are so many great policies available today that were not available 10 or 20 years ago.

So what are we seeing mostly?  We have clients that want a guarantee that their policy will be around when they die.  They are good with paying the premium but they want guaranteed premiums and a lifetime guarantee that their policy will stay in force as long as those premiums are paid.

Variable universal life (VUL) The market has been on a great run over the last 8 years and variable universal life insurance policies have performed well.  Many of our new clients see the writing on the wall with their variable policies and want to move to a safer policy that will not lose any value.  Indexed universal life insurance is a great option for a 1035 exchange since there is no risk of your policy losing value due to a downturn in the stock market.  This is a great time to lock in the value of your policy with a 1035 exchange.

Single premium policies are also on the rise.  Many of our new clients no longer want to pay any premiums for their life insurance.  We can take the lump sum from the 1035 exchange and dump it into a life insurance policy that will require no further premiums.  It will be completely paid up.

If you are someone that has an old cash value policy and want an income from it, a 1035 exchange to an annuity may be a good option.  Remember, we can go from a life policy to an annuity.

There are many reasons that a 1035 exchange may be needed.  The best thing we can do for you is to review your policy and access your priorities to determine if an exchange would benefit you.

So many of our new clients have never even reviewed their policy with their agent.  If you are someone that would like a policy review, we can help.  You can use the contact us or quote request button on our website or give us a call at 1-800-712-8519.

Frequently Asked Questions

What is a 1035 exchange?

You may exchange an existing life insurance policy that you own for a new policy on the same life. This is allowed by the IRS and you do not have to pay taxes on the funds from the existing policy.

Do I have to report a 1035 exchange?

While a 1035 exchange is a tax free transaction, you will need to notify the IRS. Often cases, you will receive a 1099-R from the insurance company where the 1035 funds came from and where the policy was closed.

Why would someone make a 1035 exchange?

A 1035 exchange allows a policy owner to replace an outdated policy, without being taxed, with a more productive policy.