For 1035 exchange, we present the following. A bit of a tutorial on what it is, how it works, and how it could benefit you. Tell us if you find this helpful!

IRC Section 1035 Exchange (like “rollovers” for annuities) – the boring stuff first:

From IRS Bulletin 2003-51 :

The legislative history of Section 1035 states that exchange treatment is appropriate for “individuals who have merely exchanged one insurance policy for another better suited to their needs and who have not actually realized gain.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. 81 (1954).
In Conway v. Commissioner, 111 T.C. 350 (1998), acq., 1999-2 C.B. xvi, the Tax Court held that the direct exchange by an insurance company of a portion of an existing annuity contract to an unrelated insurance company for a new annuity contract was a tax-free exchange under Section 1035. In that case, the transfer was made directly from the first insurance company to the unrelated insurance company, and none of the assets transferred in the transaction were received by the taxpayer.

What does all of this 1035 exchange stuff mean? Quite simply:


An owner of certain insurance contracts can exchange their cash into a new1035 exchange insurance contract. And they can do this without incurring current tax liability if the exchange follows certain rules!
This means that cash in an old life insurance policy can be transferred into a new cash value insurance policy, or into a new annuity. And that money from an old annuity can be exchanged into a new annuity. But not into a life insurance policy.

How could a 1035 exchange benefit you?


You may have built up significant cash in an old policy (which is good). But that policy lacks some of the newer features and benefits that new annuities or life insurance offer. Therefore, you consider your annuity rollover options. Some examples of improvements could be:

  • Your current annuity company’s payout ratio for conversion to an immediate annuity income stream is not as generous as another company. Solution: 1035 exchange to the new company and establish an immediate annuity.
  • Your current fixed annuity earns a simple interest rate. But you like the idea of a newer policy with a guaranteed* income rider. And the ability to invest in stocks. Solution: exchange that fixed for a variable annuity with these benefits.
  • You have a $25,000 life insurance policy with $25,000 of cash value. Your goals have changed and you want to invest the money more aggressively. Solution: exchange the life insurance for a variable annuity.
  • You have significant cash in a life insurance policy. But there it does not have a no-lapse guarantee. However, after proper analysis and comparison, you find another company. One that will offer a no-lapse guarantee. And the transfer economics work. Solution: exchange the cash value to a new life insurance policy
1035 exchange

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You could consider many options here of course. However, do not look at your life insurance or annuity in a tunnel. Prudence requires acomprehensive analysis of your insurance products.. Therefore, you can determine the best course of action to provide retirement security and develop your own plan for a secure income stream in retirement.

1035 Exchange Mistakes

Furthermore, make sure you don’t make any of the mistakes often involved with poorly executed exchanges. Especially mistakes that could cause an unintended taxable event.

Working with a financial advisor teamed with an insurance expert and tax expert can help you pull all of this together. Furthermore, if you are in this situation, analyze your assets and financial situation to see if updates to your financial plan make sense.

Don’t Know What to Do or Don’t Fully Understand the 1035 Exchange?

What would it be like to have a team of professionals helping you with your financial goals? Are you curious if we’d be a good fit to work together? If you are, click HERE to fill out our online question form. We can then set up a time to talk.

Warmly,

Chris Grande

Notes:

*You must follow Certain protocols when enacting a 1035 exchange. And the IRS can be very strict about this. Example IRS Bulletin. Consult an experienced advisor before attempting a 1035 exchange

Guarantees offered by insurance companies are based on the claims-paying ability of the insurers and are not government or FDIC guaranteed in any way.

Questions to ask advisor