1035 Tax Free Exchange
Posted by Lenny Robbins on Tue, Aug 09, 2011 @ 08:21 PM
A 1035 exchange allows for the direct transfer of funds in an insurance policy, endowment policy (whole life policy), or annuity policy into another policy without creating a taxable event. Plainly said, if you have accumulated money in a policy, you can transfer those funds to another policy and have no current tax liability.
Life insurance proceeds can be transferred into another life insurance, endowment or annuity policy. Endowment funds can go into another endowment policy (with a maturity date equal to or before the original policy). Annuity funds can transfer into another annuity policy or an endowment policy.
You must purchase an asset of "like kind and amount" in a . Similar to a rollover in a retirement account, you should have the funds transfer directly from one policy to the other. You should never take personal receipt of the funds as this will invalidate the tax free status of the exchange.
One important factor to understand is how most permanent insurance policies and whole life policies are structured. Generally the accumulated cash does not go to your beneficiary along with the death benefit. If you have borrowed any cash from the policy, that amount plus interest is deducted from the death benefit.
There are numerous reasons why a 1035 exchange may make sense for you.If you have funds accumulated in an older whole life policy, you may be able to get a larger face amount of insurance today for the same premium or less. You may also be able to move money in an annuity to one that pays more interest or has better benefits. You may choose to switch to a financially stronger company.
A 1035 exchange should not be initiated without serious considerations of what will change from your old policy to your new policy. Work with an agent familiar with 1035 exchanges to make the process effortless.