1035 Exchanges For LTC Insurance

Funding hybrid long-term care insurance using a 1035 exchange is a popular way to acquire long term care protection. This IRS code allows for a tax-free transfer of an existing insurance policy for another one of like kind.1 Examples are:

➤  Life Insurance to Life Insurance
➤  Life Insurance to Annuity
➤  Annuity to Annuity

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How a Section 1035 Exchange Works

The Pension Protection Act of 2006 modified the 1035 Exchange code.2 This change allowed for life insurance and non-qualified annuity 1035 exchanges into long term care products. Both traditional and hybrid long-term care policies are included. To qualify, the contract or policy owner must meet certain criteria:

  • 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, an exchange from an annuity 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.

1035 exchange life insurance rules.

Benefits of a 1035 Exchange

A 1035 exchange defers the internal build up of gains associated with your life insurance policy.

With annuities, a 1035 exchange may allow you to convert an existing annuity into a long-term care annuity. This can defer the gains associated with your annuity.

Because of the tax-free nature of long-term care insurance, an exchange ensures the taxable gain disappears if it’s used to pay for long-term care expenses.

1 Internal Revenue Service (irs.gov), site accessed 11/10/2022.
2 Pension Protection Act of 2006 (investopedia.com), site accessed 11/10/2022.
3 Not all long term care insurance policies and companies accept 1035 Exchanges.