What is a 1035 exchange?

A 1035 exchange is a provision from Section 1035 in the tax code that allows for the tax-free transfer of one type of insurance policy to another of “like kind.” ²

This tax code allows you to 1035 exchange life insurance to long-term care insurance. Or, a non-qualified annuity can 1035 exchange into a long-term care insurance policy. Both traditional and hybrid long-term care products are included. To qualify, the contract or policy owner must meet certain criteria as follows:

• Full and partial 1035 exchanges are allowed.
• Generally, 1035 exchanges between products within the same company are not reportable for tax purposes as long as the IRS criteria is met. Some rules will vary by company.³
• The annuitant or policyholder must remain the same. For instance, a 1035 annuity exchange of a policy owned by Tom Smith cannot be exchanged into an annuity owned by Janet Smith. Nor could it be a joint annuity owned by Tom and Janet Smith.
• The contract or policy owner must not take constructive receipt of the funds to buy a new policy. So funds must be transferred straight from one company to the other.

Considerations

1035 Exchange Life to Long-Term Care Insurance

Consider a 1035 exchange of your old life insurance policy to a long-term care policy. As you age, you may find that your life insurance needs have changed and a higher priority is to protect against potential long-term care needs.

A first step will be to consult with an LTC specialist to determine that you will be able to qualify for any new coverage.