If you’ve accumulated cash value in a permanent life insurance policy, you can use the IRS’s 1035 exchange life insurance rules to use that cash to your advantage. A 1035 exchange occurs when the cash in an existing life insurance policy is transferred to a new policy, without incurring any tax. (It’s called a “1035 exchange” because Section 1035 of the IRS’s tax code permits these tax-free exchanges.)
The Potential Benefit to Your Wallet
The elimination of tax consequences opens up opportunities for you to save money. Depending on your current insurability, there are many ways 1035 exchanges can reduce your life insurance cost, by:
- Paying Down a New Policy. By applying the accumulated cash reserve, which includes earned interest, to a new policy, you can “pay down” the cost of the new policy. It’s like putting a larger down payment on a home to lower your mortgage. With life insurance 1035 exchanges, you can similarly lower your premiums, or get more death benefit for the same premium you’ve been paying.
- Finding a Carrier with a Lower Premium. One of the great advantages of the 1035 exchange for life insurance policyholders is that it allows flexibility. You can easily move to another carrier and may be able to pay less by using the cash in your present policy.
- Getting a Better Health Rating. If your health has improved since you qualified for your existing policy, 1035 exchanges enable you to switch to a new policy, without any tax cost, and go through underwriting again. You will lower your cost because you will qualify for a less-expensive health rating and use the cash available to lower your premium.
- Switching to a Financially Stronger Carrier. Because it’s a tax-free move, it’s not a problem to switch from a carrier that’s financially struggling to one that’s financially solid. This is a proactive step to prevent the hassle and potential loss of value that you might experience due to your existing carrier’s financial instability.
The Conditions You Have to Meet
The IRS has only three requirements for the exchange to be tax-free.
- The owner(s) of both policies are the same.
- IMPORTANT- You never take direct possession of the money being transferred. The money goes directly from one insurer to the other.
- The new policy's face amount is equal to or greater than your existing policy.
The Guidance You Need
Independent life insurance agents with extensive experience executing 1035 exchanges can help you get the most benefit from them. An independent agent can guide you through the process, and their industry knowledge will ensure that you’re saving as much money as possible.
The Bottom Line
Put the cash value in your permanent life insurance policy to work for you. With the help of an independent life insurance agent, you may be able to use that cash in a 1035 exchange to lower your life insurance bill.