Section 1035 Exchange: Potential for a Tax Free Exchange of an Annuity or Life Insurance Policy

As an alternative to a taxable policy surrender followed by the purchase of a new policy, an old policy may be exchanged for a replacement policy. As with surrender, a policy exchange may result in realized gain or loss.

In certain circumstances, however, the realized gain or loss need not be recognized, at least at the time of the exchange. The theory behind non-recognition treatment is that when a policyholder exchanges one policy for another, the original investment continues, so appreciation of the investment should not be taxed currently. The Code, however, provides that only specified policies and certain types of exchanges qualify for non-recognition treatment.

In order for the new contract to qualify as a Section 1035 Exchange, the policyholder must have exchanged his or her existing contract for an equivalent new contract. The annuitant or policyholder must also remain the same. Application of a check received for the old contract against the new contract does NOT qualify.

Contact us to discuss the potential tax implications of exchanging your life or annuity contracts.