Can You 1035 Exchange From Life Insurance To An Annuity? – All You Need To Know

What is a 1035 exchange? How do they work? 1035 exchanges can get complicated. In this guide we will answer common questions about the 1035 exchange and how you can utilize it to have guaranteed income for life and how the 1035 exchange relates to annuities and life insurance.

Table Of Contents

• What Is A 1035 Exchange?
• How Does A 1035 Exchange work?
• When Is A 1035 Exchange Good For A Life Insurance Policy?
• Summary
  
  

What Is A 1035 Exchange?

A 1035 exchange is part of the tax code that allows that tax-free transfer of these certain types of financial products.

• Life Insurance
• Annuity
• Long Term Care
• Endowment

This way you can exchange products that you no longer want or those that are underperforming to another product with no tax consequence.

How Does A 1035 Exchange Work And What Qualifies?

Generally, the exchange between “like kind” products must be the same type of product. This means you can exchange an annuity for another annuity, or a long term care product for another long term care product.

One exception to this rule is that you can exchange a life insurance policy for a non-qualified annuity, endowment, or long term care product. You cannot exchange the other way around however.

This gives life insurance policies much more flexibility, giving you the option to surrender and annuitize your life insurance policy that has cash value for income.

When Is A 1035 Exchange Good For A Life Insurance Policy?

There are only certain times when a 1035 exchange makes sense.

Since the whole point of the 1035 exchange is to get tax savings, if you do not have any gain on your life insurance policy there is no point to doing a 1035 exchange as there is no gain to be taxed in the first place.

A gain on your life insurance policy is the difference between the total cash value (minus any loans on the policy) and the premium tax basis, which is generally the total amount of premiums you have put into the policy.

Most people do not have any gain on their life insurance policy for many years as it takes quite a while for a life insurance policy to grow cash value.

The gain on the life insurance policy, if you have any, will be taxed as ordinary income in your tax bracket if you surrender the policy while still living and take out the surrender value. It is important to note that payout due to death will always be tax free.

A 1035 exchange is generally only a good idea if you have a gain on the insurance policy, want to surrender the policy, and want to convert that policy into a new product like an annuity, another life insurance policy, or long term care product.

Summary

We help seniors do a 1035 exchange every day for their life insurance policies, annuities, and long term care products but they are not necessary for everyone. The fact is, most people do not enough cash value in their life insurance contract to trigger any tax and warrant a 1035 exchange. Others may save thousands in taxes by setting up a 1035 exchange.

If you are unsure how much you can save or if a 1035 exchange is worth it for you, contact us to discuss your options. If you want quotes on annuities, burial life insurance, or other products give us a call or fill out our quote form and we will be in touch to discuss all of your options.

Note: This is not tax or investment advice.