Section 1035 Exchanges

QUESTION: does your life insurance policy need an update ?

Answer: If you don’t know, it probably does! Insurance needs change as your family, financial, and business
needs change. Just as technology created new means of communication and streamlined old methods, new types of insurance programs sold by ethical agents will match the most current features and updates to your changing needs. If a new product provides a more cost effective solution than your old product, then you may consider exchanging the old policy for a new one. This is particularly important if the insurer that sold your current contract is financially unstable.


Here are SEVEN points to consider when reviewing an old policy:

1. You feel a higher rate of return may be realized with a new policy.
2. You feel that the current insurer may become insolvent and a more stable insurer can be obtained through a policy exchange or diversification of insurance carriers will increase safety and/or return.
3. You have exercised a loan provision against a policy, the interest paid on the policy is non-deductible, costs are increasing and you need to continue coverage.
4. You would like to change from an individual to a group product.
5. You can achieve a higher death benefit with a new product.
6. You would like to change an ordinary life policy into a single premium policy to eliminate the premium payment burden, obtain a higher rate of return on the underlying cash value and obtain a higher death benefit.
7. You have an ordinary life contract and you would like to exchange it for a universal, variable, or interest sensitive policy. Premium rates on the new policy are lower due to such factors as improved mortality tables, a non-smoking discount, a volume discount for several policies aggregated into one or other factors.

Federal income tax law facilitates certain exchanges by providing that in some instances they may be
made without the immediate recognition of gain. Although such transactions are sometimes referred to
as “Section 1035 tax-free exchanges,” the gain at the time of the transaction is deferred rather than
recognized as an immediate taxable event.