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1035 Life Insurance Exchange Guidelines and
Exchange Procedures
A Section 1035 exchange permits a policy-owner to transfer the
cash value from one life insurance or annuity contract to another
without income tax consequences, provided proper procedures are
followed and the policy-owner does not receive any property in the
exchange.
Even if there is no gain in the policy to be exchanged, a
1035 exchange permits the adjusted cost basis of the old policy to
be carried over to the new policy. To qualify, however, the insured
and owner must be the same on both policies and the exchange must
involve:
• A life insurance contract for another life insurance
contract or an annuity contract.
The exchange of two single life policies for a policy
insuring two lives (survivorship policy) does not qualify as
a non-taxable exchange. The IRS has permitted an exchange of
a survivorship policy where the first insured has died for a
single life policy insuring the life of the surviving
insured.
• An endowment contract for an annuity contract.
• An annuity for an annuity. An exchange of an annuity for
a life insurance policy is not a 1035 exchange and may result in
income tax consequences.
Note:
Theses rules do not
apply to any exchange having the effect of transferring property to
any non-United States person.
Product:
In order to accommodate the transfer of values, the
life insurance product must be able to accept unscheduled deposits.
The product for an exchange of a policy
"with no
outstanding loan"
should be either a Universal Life or
Whole Life with Paid Up Additions Rider plan of insurance.
Underwriting: Full evidence of insurability based on age and
amount applies.
Replacement Compliance: Full compliance with appropriate
state replacement regulations applies.
Procedure: In order to process an exchange, the field
representative should obtain:
1. The completed state-specific application with wording
in the "Special Instructions" section to indicate "This is a
1035 exchange." Suggested wording to avoid amendment:
• 1035 Exchange proceeds only; or
• 1035 Exchange proceeds plus planned premium; or
• 1035 Exchange proceeds plus planned premium
plus lump sum deposit of $_____________; or
• 1035 Exchange proceeds plus lump sum deposit of
$_________________
2. Evidence of insurability based on the insured’s age
and amount applied for.
3. The applicable 1035 Exchange Form should be signed (original
signature (s) only) by the owner (s), collateral assignee, etc. This
agreement contains a number of conditions and should be read
carefully by the owner (s) before signing.
If the owner is a corporation or other business entity,
provide the full name of the entity followed by the
signature and title of the authorized party. If the owner is
a trust, provide the full name of trust and trust date,
followed by the signature (s) of the trustee (s). Insert the
title "Trustee (s)" following the signature (s).
4. A copy of the trust agreement where applicable.
5. The old policy or policies should be returned with the applicable Exchange
Form.
6. All state-specific replacement paperwork.
7. Conditional Insurance Receipt or Temporary Insurance
Receipt (issue state specific) if money is taken with the
application.
Upon receipt of the above requirements, the following will
generally occurs:
1. If the Company approves the new policy for insurance
in a standard or better rating class, or in a rated class
that had previously been requested and accepted in writing,
the Company will request surrender of the old policy.
2. If the new policy is approved with a rated premium,
the Company will await the confirmation of acceptance by the
owner prior to beginning the surrender process.
3. The Company will issue the new policy for delivery
upon receipt of the 1035 proceeds.
4. If surrender cannot be effected, the old policy will
be reassigned to the policy-owner and the Company’s
obligations under the exchange agreement will terminate.
5. If the policy-owner declines acceptance, or returns
the new policy under the "Free Look" provision, the Company
will, in its discretion, either cooperate with the
policy-owner in attempting to reinstate the policy (ies)
with the prior insurer or deliver all payments made with
respect to the new policy to the policy-owner.
Other Issues:
• Insured/Annuitant and owner must be the same on
both policies/contracts (before and after exchange.)
• If the policy is owned by a trust, original
signatures of ALL trustees as owner are required,
together with their title (s).
• Complete name and date of trust must be included.
• Submit a copy of the trust showing section listing
trustees.
• If owned by a business entity, include title of
party signing on behalf of the business entity and
complete company name.
• All external exchanges average 30 days of
processing time from receipt of paperwork in good order
at the exchanging company.
Some companies require company specific forms
AIG--- American Express--- American
Genera---l AVIVA--- Canada Life--- Conseco--- Farmers &
Traders--- First Investors--- Great West--- Hartford---
IDS--- Lincoln Security--- Mass Mutual--- Modern Woodmen National Life--- Northwestern Mutual---
Phoenix Life--- Presidential--- Principal--- Prudential---
Reliastar/ING--- SBLI--- US Life
The listing provided is not comprehensive and is subject
to change. We recommend that you contact the existing
insurer to obtain exchange requirements prior to submitting
documents.
Special Notes
1. Approximate processing time for exchanges is 30 days
from receipt of paperwork in good order at the company that
issued the contract to be exchanged. Clearly, conservation
will be attempted, and you should be prepared for a
significant delay before the surrender proceeds are received
and applied to the new policy.
2. An exchange of a life policy issued prior to June 21,
1988, that would be a modified endowment contract if issued
after the effective date of IRC Section 7702A (i.e., fails
the 7-pay test), will lose its grandfathered status. It is
unlikely that such an exchange will be in the client’s best
interest.
3. The new insurer will not pay premiums if any become
due on the old policy (s). If the client wishes assurance
that there is no break in coverage before issue of the new
policy, the client should be instructed to pay the premiums
on the in-force policy, although it might be prudent to pay
the minimum modal permitted.
4. Some insurance carriers will not transfer the
outstanding loan balance on life insurance products. Such
carriers will surrender the loan first, with the balance of
the funds transferred to the new policy. This treatment may
create an adverse tax consequence.
5. While 1035 exchang es
allow for tax-free treatment, some situations can result in
immediate taxation. For example, the receipt of any cash or "boot"
not poured into the new contract will result in income tax to the
extent of any gain in the contract.
A Word of Caution
We encouraged the parties involved to seek the independent advice of a
competent tax advisor before proceeding with any 1035 life insurance exchange.
TermLifeAmerica.com-
Lewis Fink is licensed as an
insurance agent offering Life
Insurance in the following states:
Alabama - AL,
Arkansas - AR,
California - CA,
Colorado - CO,
Connecticut - CT,
Delaware - DE, District of Columbia - DC,
Florida - FL,
Georgia - GA,
Idaho - ID,
Illinois - IL,
Indiana - IN,
Iowa - IA,
Kansas - KS,
Kentucky - KY,
Louisiana - LA,
Maine - ME,
Maryland - MD,
Massachusetts - MA,
Michigan - MI,
Mississippi - MS,
Missouri - MO,
Montana - MT,
Nebraska - NE,
New Mexico - NM,
New Jersey - NJ,
New York - NY,
North Carolina - NC,
North Dakota - ND,
Ohio - OH,
Oklahoma - OK,
Pennsylvania - PA,
Rhode Island - RI,
South Carolina - SC,
South Dakota - SD,
Tennessee - TN,
Texas - TX,
Utah - UT,
Vermont - VT,
Virginia - VA, and
Wisconsin - WI.
Not all insurance products from all insurance companies are available in
all states.
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