AALU: 1035 Exchanges of Life Insurance Policies

1035 Exchanges of Life Insurance Policies — How Easy Are They Really?

Complex tax laws and the emergence of new, more sophisticated life insurance products emphasize the need for life insurance solutions that offer flexibility to adapt to changing circumstances.

Internal Revenue Code (“Code”) § 1035(a) allows the exchange of a life insurance contract for another, generally without requiring recognition of gain upon the exchange. Failure to understand the technical components of 1035 exchanges, however, can lead to unanticipated tax consequences, including the receipt of taxable “boot,” the unintentional acquisition of a “MEC,” and the potential loss of grandfathered status for split-dollar arrangements. Yet, with proper implementation, 1035 exchanges also can provide significant insurance planning flexibility, allowing clients to exchange policies to (1) access more cost-effective or higher return products, (2) make changes to coverage levels based on current needs, (3) reduce or modify scheduled premium outlays, or (4) diversify coverage exposure among insurance carriers.

Learn how to add value to your clients by periodically reviewing the sufficiency of a client’s coverage, identifying opportunities for exchanges to acquire better or more cost-effective insurance products, and understanding the technical nuances of exchange implementation in order to effect a compliant 1035 exchange in the latest Washington Report.