You may have heard the term 1035 exchange before. But do you know what it is, or better yet, do you know if it applies to you? While a 1035 exchange can be a complex financial strategy, there is a simple way to explain it. If you’re the owner of a life insurance or annuity contract, it could benefit you so read further.
Life insurance policies and annuity contracts purchased long ago may include less favorable contract conditions than what is currently available for purchase today. A 1035 exchange allows a life insurance or annuity contract policy owner to exchange an old policy or contract for a new one from a different company without tax consequences. This tool can offer the opportunity to receive benefits from a more useful contract.
According to www.finra.org, there are two most important items to note regarding 1035 exchanges. First, it is not an option to request and receive a check from one policy and apply the proceeds to the purchase of a new one. Second, a tax-free exchange is from a life insurance policy to another life insurance policy or a life insurance policy to an annuity. An exchange of an annuity contract for a life insurance policy is not allowed.
It also may be an option to do a partial 1035 exchange, which exchanges a portion of the total contract amount. These can become a bit tricky, so it’s always a good idea to consult your financial or tax professionals first to determine if a partial 1035 exchange can benefit you, and second whether a partial 1035 exchange would potentially trigger a taxable event.
There are some reasons you may want to exchange an existing policy and also reasons why it may not be the best idea:
Reasons to exchange
Reasons NOT to exchange
Additionally, you should be aware of the total costs for an exchange, understand the features and why they are recommended as well as any possible options available for modifying the current policy without having to do an exchange. It is always best to consult your financial professional to evaluate whether your specific policy or contract could benefit from a 1035 exchange.
If you have an old insurance policy or annuity contract that you would like reviewed to determine whether a 1035 exchange would benefit you, we encourage you to schedule an appointment with us today.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.