What Is A 1035 Exchange On A Long-Term Care Policy?

A 1035 exchange can help you fund a hybrid long-term care insurance policy. This IRS code allows for a tax-free transfer of an existing insurance policy for another one of like kind.1 For example, you may be able to use an old life insurance policy or annuity to pay for your long-term care protection. Examples are:

➤  1035 Exchange Life Insurance to Life Insurance
➤  1035 Exchange Life Insurance to Annuity
➤  1035 Exchange Annuity to Annuity

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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.

1035 exchange life to long-term care insurance.


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.

Benefits of a 1035 Exchange

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

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

Because of the tax-free nature of long-term care insurance, a 1035 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.

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