1035 Exchanges

Many people own an old life insurance policy or annuity that no longer fits. Cashing it out can create a tax bill. A section 1035 exchange, named for a section of the federal tax code, lets you move the value straight into a new contract without paying tax on the gain at that time.

What can be exchanged

How it works

• Apply for the new policy or annuity.
• Sign the exchange paperwork so the money moves directly from the old company to the new one.
• Don't take the check yourself. If the money passes through your hands, it is usually treated as a cash-out, not an exchange.
• Keep the old contract in force until the new one is approved and issued.

Things people find out too late

• Surrender charges. The old contract may charge a fee to leave, and the new one may start a fresh surrender period.
• A new waiting period. A new life policy usually restarts the contestability and suicide clauses, typically two years.
• Health matters. A new life policy may require medical underwriting and may cost more at an older age.
• Loans can be taxed. An outstanding loan on the old policy can create taxable income during the exchange.
• Features can be lost. Older contracts sometimes carry guaranteed rates or benefits that are no longer sold.

Is it right for you?

Sometimes an exchange makes good sense. Sometimes keeping what you have is the better choice. We will compare both side by side, in writing, and tell you which one we would choose in your shoes.

For general educational purposes only. Not tax, legal, or investment advice. Product features, riders, and tax treatment vary by insurer, policy, and individual circumstances. Consult a qualified tax professional before making decisions.