Unlocking the Benefits of IRC Section 1035 for Your Life Insurance Policies

Paul Pichie

4/27/2023 · 2 min read

We are excited to share some valuable insights about Internal Revenue Code (IRC) Section 1035, a little-known but powerful tax provision that can help you optimize your life insurance and annuity policies. By understanding and leveraging the benefits of Section 1035, you can make the most out of your existing insurance policies without incurring unnecessary tax liabilities. What is IRC Section 1035? IRC Section 1035 allows you to exchange an existing life insurance policy or annuity contract for a new one without triggering a taxable event. This tax-free transfer can be done under three specific circumstances:

  1. Exchanging a life insurance policy for another life insurance policy.
  2. Exchanging a life insurance policy for an annuity contract.
  3. Exchanging an annuity contract for another annuity contract. It is important to note that exchanging an annuity contract for a life insurance policy does not qualify for the tax-free treatment under Section 1035.

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Benefits of utilizing IRC Section 1035

  1. Flexibility: As your financial goals and needs change over time, Section 1035 allows you to adapt your life insurance or annuity policies to better align with your objectives. By exchanging one policy or contract for another, you can customize your coverage and investment features to suit your evolving circumstances.
  2. Preserving tax advantages: The tax-free nature of a Section 1035 exchange means that you can maintain the tax-deferred status of your existing policy’s accumulated cash value, preventing any immediate tax liabilities. This allows your investments to continue growing tax-deferred, maximizing your long-term returns.
  3. Cost-efficiency: A Section 1035 exchange can help you find a more cost-effective policy or contract without losing the benefits of your current one. By transferring to a policy with lower premiums or fees, you can enhance the overall value of your life insurance or annuity coverage.
  4. Consolidation: If you own multiple policies, a Section 1035 exchange can help you streamline your insurance and investment portfolio by consolidating them into a single policy or contract. This can simplify your financial management while still preserving the tax advantages of your existing coverage.

Important Considerations

While IRC Section 1035 offers significant benefits, it’s crucial to carefully evaluate your options before initiating an exchange. Keep in mind that insurance carriers may impose surrender charges on the existing policy or require new underwriting for the replacement policy. Additionally, the new policy may have a different cost structure or investment performance that could impact your clients’ financial goals. To ensure that a Section 1035 exchange is the right move for you, we recommend reviewing your case study with BackNine’s Advanced Markets area so they can assess your clients’ individual needs and circumstances. If you have any questions or would like to discuss how IRC Section 1035 can benefit your clients’ life insurance or annuity policies, please don’t hesitate to contact our team at (818) 221-0010 or at [email protected]. We are here to help you make the most of your life insurance planning services.

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