Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client wants to exchange two life policies—one covering the husband, the other covering the wife—for a new survivorship policy under Code Section 1035.  Is that allowed?

Answer: No.

In exchanges of life insurance policies, the insureds on both the old and new policies must be identical.  In Private Letter Ruling 9542037, the Service ruled the exchange of a single life policy on the husband for a joint life policy on husband and wife was not tax-free because the insureds weren’t identical.  Similarly, the exchange of two policies – one on the husband and one on the wife – for a new joint policy on husband and wife didn’t qualify as a 1035 exchange.

The converse also holds true; a joint life policy on husband and wife cannot be exchanged tax-free for two individual policies, one on husband, one on wife.

However, the Service did rule in Private Letter Ruling 9330040, that it’s possible to do an exchange of a joint policy after the death of one of the insureds for a single life policy on the survivor.

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