1035 Exchange Rules For Life Insurance and Annuities
What is a Section 1035 Exchange?
A 1035 exchange is a provision in the United States tax code which allows you, as a policyholder, to transfer funds from a life insurance or annuity to a new policy, without having to pay taxes.1
This has become a popular way to fund hybrid long term care insurance policies. Hybrid Long Term Care Insurance policies are popular alternatives to long term care insurance.
1035 Exchange Rules For Life Insurance
A 1035 exchange can allow you to convert your existing Life Insurance policy to a Life Insurance with Long Term Care Rider policy.
The 1035 exchange defers the internal build up of gains associated with your life insurance policy. Because of the tax-free nature of long term care insurance, a 1035 exchange ensures the taxable gain disappears if used to pay for long term care expenses.
1035 Exchange Rules For Annuities
Like life insurance, 1035 exchange rules may allow you to convert an existing annuity into a long term care annuity. This can defer the gains associated with your annuity.
Acceptable 1035 Exchanges for Life Insurance and Annuities
Hybrid Long Term Care Insurance
A hybrid long term care insurance policy combines the benefits of life insurance, or an annuity, with long term care benefits. You can buy a hybrid long term care insurance policy by paying a one-time lump sum premium, or over a set period of time.
If long term care is never needed, the policy works much like a traditional life insurance policy. It would then pay a death benefit to your beneficiary when you die. And the death benefit is often similar to the amount paid for the policy. But if you need long-term care, the amount of money available can exceed the death benefit or long term care annuity value, often several times over, offering tremendous leverage of premium dollars.
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1 We do not provide tax or legal advice and suggest you consult with your accountant or tax professional. The Pension Protection Act of 2006 provides this advantage of tax-favored long term care insurance payments. Not all long term care insurance policies and companies accept 1035 exchanges.