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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?
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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