Understanding Life Insurance Plans

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Questions About 1035 Life Insurance Exchanges

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With a Section 1035 Exchange Life Insurance, you are permitted to exchange your life insurance policy for a new policy without having to pay tax on any investment earnings from your original policy contract. Many life insurance policies that are variable are actually registered securities. Since these policies are registered with the Securities and Exchange Commission, there may be investment returns on the insurance plan. As a result, based on the policy earnings, the cash value of the plan can fluctuate.

Nevertheless, if you are interested in a 1035 Exchange, you may not know much about this IRS allowance. Here are a few details:

Can you exchange the policy for a check?

Tax laws only allow your current insurance policy to be swapped for a new policy. You are unable to receive cash for the policy and then apply the money towards a new policy.

In what instances is the exchange tax-free?

The exchange of your current policy for another is not taxed if the insurance policy is switched to an annuity or if the policy is exchanged for another life insurance policy.

Why should you swap your existing policy for a new one?

There are multiple reasons why you might want to replace your existing policy. Here are a few of them:

  • You may find another life insurance policy that has options and features that you prefer over those of your current policy. By shopping around, you can find a more suitable product that better meets the needs of you and your family.
  • You may find similar coverage at a lower price.
  • The insurance company that issued your current policy may not be providing the type of service that you prefer.

When does an insurance broker typically recommend an exchange?

An insurance agent or broker may be receiving a commission from a change in your life insurance, but he or she is required to explain the facts surrounding your exchange, including the cons. Typically, a broker or agent should only recommend an exchange if it is best for you as a customer. Thus, he or she will have to evaluate your specific needs and finances as well as how well you are able to pay for a new policy before proposing a policy change.

In some cases, there is not an even exchange. The new insurance policy may be more expensive. The money associated with the initial policy is applied towards the payment for the new policy, but it is not enough to cover the total cost.

To learn more about 1035 life insurance exchanges, schedule a consultation with an insurance professional in your area.