What is an IRS 1035 Exchange

If you want to learn the core of what is a 1035 exchange, then read this section very carefully. The section 1035 exchange is basically a tax free exchange of life insurance policy or an annuity contract for a new one. If you are concerned about what a 1035 exchange is, then you should also keep in mind that you can only qualify for the section 1035 exchange for a new contract when the policy holder exchanges the existing contract in return for the new contract. In this case, the annuitant and the policy holder should be the same.



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Furthermore, section 1035 exchange is actually a provision of the United States tax code which gives the ability to transfer funds from an annuity, endowment or life insurance policy to a policy of a similar type. When the funds are transferred from the old to the new policy, the exchange can occur under section 1035 without any taxes.

Now that you have understood what a 1035 exchange is, you should also know that with this life insurance policy, you will be able to transfer your funds for putting off any gains. For example, if you transfer all the proceeds from an old policy to the new one, no taxes will be levied on the gain of the original policy at the time of transfer if there are no outstanding loans on the original policy. On the contrary, if the gains from the policy are transferred without using the 1035 exchange, they will be taxed at the ordinary income tax rates of the policy holder.

All those asking what a 1035 exchange is, they should remember that even if a policy does not have any gains, they will be advantageous no matter what. With 1035 exchange insurance, policy holders can avoid paying more taxes than required by the federal laws, like in a modified endowment contract. Also, when policy holders like paying future premiums for a new policy, the 1035 exchange can be helpful at that time as well. This lets individuals enjoy purchasing a new policy without having to pay more money.

Moreover, even when there are no gains to be deferred, section 1035 exchange still permits a policy holder to preserve their basis. For instance, if the cash value of the original policy is higher than the gross value, this means that an individual is suffering losses. But, a 1035 exchange helps policy owners enjoy the higher basis of the new contract. The original contract's tax basis becomes the new contract basis in this scenario.



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