What is Section 1035 Exchange?
A Section 1035 Exchange, part of the U.S. tax code, enables individuals to exchange an existing life insurance policy, annuity contract, or endowment for a new one without immediate tax consequences. Named after Section 1035 of the Internal Revenue Code, this provision is particularly beneficial for those seeking better terms, updated policies, or lower fees without triggering a taxable event.
This exchange process is available for various life insurance and annuity products, including whole life insurance, term life insurance, and indexed universal life insurance policies. For instance, a policyholder might use a 1035 exchange to transition from an older whole life insurance policy with limited benefits to a newer, more flexible indexed universal life policy. This switch can help adjust for changing financial goals or market conditions while maintaining the tax-deferred status of any gains in the original policy.
The Section 1035 Exchange process has certain restrictions, including that the old and new contracts must be of similar types and involve the same policyholder. Additionally, if an annuity is exchanged, the new annuity must carry equal or better terms. Policyholders should consult with financial advisors to ensure that the exchange aligns with their long-term financial objectives.
Overall, Section 1035 Exchanges offer flexibility to policyholders seeking better coverage options, modern features, or optimized costs, all while avoiding immediate tax liabilities.
