Advanced Underwriting Consultants

WHAT EVERY FINANCIAL PROFESSIONAL NEEDS TO KNOW ABOUT SECTION 1035 EXCHANGES

INTRODUCTION 

One of the most important of all Code Sections relating to life insurance is Section 1035 – which enables the very important Section 1035 exchange.  The key to the popularity of this provision is that – if arranged properly – the taxpayer can avoid recognition of any taxable gain from the disposition of an existing policy. 

Section 1035 allows a client to trade one insurance policy for another without an immediate income tax result.  A Section 1035 exchange is an incredibly valuable tool when used correctly. 

What factors might cause a client to consider a Section 1035 exchange? 

  1. The new policy provides better benefits or investment performance than the existing one.   
  2. The cost to maintain the new policy is lower than that for the existing policy. 
  3. The new policy is more suited to the client’s investment philosophy or insurance needs than the old one. 

Section 1035 of the Code is deceptively simple.  However, there are plenty of traps for the unwary financial professional.  Any of the following missteps may lead to an undesirable result: 

  • Failing to follow the steps properly
  • Attempting to complete an unapproved exchange
  • Ignoring special rules 

Our clients rely on us to guide them through the unique tax issues associated with the purchase of insurance products.  They have a right to expect us to know when to implement Section 1035 exchanges  to help them have those exchanges meet the letter of the law, and to sidestep potential minefields. 

They also want us to make sure that the insurance carriers involved will treat the transaction as a proper Section 1035 exchange, and follow the steps necessary so that there are no unexpected problems or arguments with the IRS.