Section 1035 Exchanges: Tax-Free Transfers Between Life Insurance Policies

A Section 1035 Exchange is a provision in the U.S. tax code that allows policy owners to transfer the cash value from one life insurance policy or annuity to another eligible contract without incurring immediate tax liability on the gain. This is a powerful tool for optimizing permanent coverage.

When a 1035 Exchange is Used

Policyholders commonly use a 1035 exchange to transfer funds from an existing policy to a new, better-performing policy due to reasons like:

• **Lower Internal Costs:** Moving to a newer policy with lower administrative fees.
• **Higher Guarantees:** Moving from a Universal Life policy that is underperforming to a more stable Whole Life policy with stronger guarantees.
• **Adding Features:** Moving to a policy that offers better riders, such as an LTC rider.

Rules for a Valid Exchange

To qualify for tax-free status, the exchange must generally be life insurance for life insurance, and the funds must move directly from the old insurer to the new insurer. The policy owner must remain the same on both policies.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Due to the complexity of the tax code, a 1035 exchange must be executed under the guidance of a licensed financial professional and tax advisor.