What Is a 1035 Exchange? Definition and How the Rules Work

A 1035 exchange is a tax-deferred exchange of one life insurance policy for another. This can be done for a variety of reasons, such as changing the beneficiary, getting a new policy with different features, or simply getting a better rate.

There are a few key things to keep in mind when doing a 1035 exchange. First, the new policy must be of equal or greater value than the old policy. Second, the exchange must be completed within 60 days of the surrender of the old policy. Third, the new policy must be used for the same purpose as the old policy.

If you meet these requirements, then you can generally do a 1035 exchange without having to pay any taxes. However, there are some exceptions to this rule. For example, if you take a loan against the new policy, then you will have to pay taxes on the interest income.

Overall, a 1035 exchange can be a great way to get a new life insurance policy without having to pay any taxes. However, it is important to understand the rules and requirements before you do one.

Here are some additional details about how 1035 exchanges work:

• The new policy can be from any insurance company, but it must be a life insurance policy.
• The new policy can have different features than the old policy, such as a different death benefit, cash value growth rate, or premium payment schedule.
• The new policy can be used for the same purpose as the old policy, such as retirement income, estate planning, or providing for a loved one.
• If you do a 1035 exchange, you will not have to pay any taxes on the gain in the old policy. However, you will have to pay taxes on any earnings in the new policy.
• You can do a 1035 exchange as often as you like, as long as you meet the requirements.

If you are considering doing a 1035 exchange, it is important to talk to your financial advisor first. They can help you understand the rules and requirements and make sure that it is the right option for you.