A 1035 exchange is a tax-free transfer of life insurance, endowment insurance, or an annuity in the US. It requires transferring to a new policy of equal or greater cost and is only allowed as a one-to-one transaction. An insurance company can provide information and help with the exchange process.
In the United States, a 1035 exchange is the tax-free transfer of life insurance, endowment insurance, or an annuity. Named after the Internal Revenue Service tax code section 1035, this type of transfer is possible when it will not create a profit or loss for the account holder. To avoid paying taxes on this type of transfer and qualify for a 1035 exchange, a person must transfer to a new policy that is equal to or greater in cost than the original policy. The main reason a person might choose a 1035 exchange is to make a policy exchange without worrying about losing money or paying taxes.
In general, 1035 exchanges are allowed from one life insurance policy to another. However, this is only allowed as a one-to-one transaction. Transferring multiple policies to a new policy is generally not allowed. A person can also choose to transfer a life insurance policy to an annuity as a 1035 exchange, but the same is not allowed if a person transfers an annuity to a life insurance policy; such transfer does not comply with the rules of IRS section 1035.
A life insurance policy can also transfer to estate insurance, and estate insurance can transfer to an annuity or other estate insurance policy. When an endowment insurance policy is transferred to another endowment insurance policy, the tax law requires that regular payments begin no later than they would under the original contract. An annuity cannot be transferred to endowment insurance through a 1035 exchange. To qualify for a 1035 exchange, an annuity can only be transferred to another annuity.
Typically, a person considering a 1035 exchange contacts the company that holds their life insurance, endowment insurance, or annuity policy for information about the 1035 exchange process. The company can usually inform the holder account about the steps you will need to take for this type of exchange. If you want to transfer to a policy at a different company, the new company can also be a source of information and help.
Once a person has decided on an exchange and has ensured that they meet the eligibility requirements for the exchange, they must decide which type of account to transfer to. An individual may seek the advice of an insurance agent or financial adviser if he is not sure how to decide. Then, typically, he’ll have to fill out forms for both the exchange and the replacement account he’s chosen. Once the required forms are completed and processed, the account holder’s money is transferred from their old policy to the new account.
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