1035 Exchange
Considering a 1035 exchange? Review the details before moving an existing contract.
A Section 1035 exchange may allow certain eligible exchanges of life insurance or annuity contracts without immediate recognition of gain, subject to specific tax rules. It is not automatically appropriate or tax-free in every circumstance.
What a 1035 exchange may involve
Under Section 1035 of the Internal Revenue Code, certain exchanges of life insurance, endowment, or annuity contracts for a similar contract may qualify for favorable tax treatment. Eligibility rules are specific, and not every exchange qualifies. This page is educational only and is not tax advice.
Why existing contract benefits matter
An existing contract may include benefits, riders, or guaranteed terms that a newer contract may not replicate. Before exchanging a contract, it is worth understanding exactly what features you currently have and what you might give up.
Surrender charges, new waiting periods, and liquidity
Exchanging into a new contract may restart surrender-charge schedules and waiting periods, and could affect your access to funds for a period of time. Reviewing these details before acting is an important step.
Tax basis, gains, loans, and distribution considerations
Outstanding policy loans, prior withdrawals, and your contract's cost basis can all affect whether and how a 1035 exchange is treated for tax purposes. These details are generally reviewed with a qualified tax professional before any exchange is initiated.
Why tax and legal review is important
Because 1035 exchange rules are specific and the consequences of an improperly executed exchange can be significant, it is important to review your situation with a qualified tax or legal professional before taking action.
Frequently asked questions
Is a 1035 exchange always tax-free?+
No. A 1035 exchange may allow certain exchanges without immediate recognition of gain, subject to specific IRS rules, but it is not automatically tax-free in every circumstance. Consult a qualified tax professional.
Can I exchange any insurance or annuity contract this way?+
No. Only certain types of exchanges between similar contract types may qualify. Eligibility depends on IRS rules and the specific contracts involved.
Will I lose benefits from my current contract if I exchange it?+
Possibly. Existing riders, guarantees, or contract terms may not carry over to a new contract. Review these details carefully before making a decision.
Should I surrender my contract and then buy a new one?+
Generally, surrendering a contract and separately purchasing a new one is treated differently than a 1035 exchange for tax purposes. Do not surrender an existing contract or accept proceeds before obtaining individualized tax guidance.
Does Be Wealth provide tax advice on 1035 exchanges?+
No. Be Wealth does not provide tax or legal advice. A 1035 exchange should be reviewed with a qualified tax professional before any action is taken.
Sources
We only cite official sources. This list is maintained as content is updated.
Be Wealth does not provide tax or legal advice. A 1035 exchange should be reviewed with a qualified tax professional before any action is taken. Do not surrender an existing contract or accept proceeds before obtaining individualized guidance.