1035 Exchange Life Insurance To Annuity

by Junior Boomer on December 1, 2010

For those who wish to upgrade their life insurance or change to annuities, one of the biggest considerations is doing so without incurring tax penalties. Certainly this can be challenging in good economic times but when economy is bad there can be additional difficulties. At the same time, the life insurance industry is taking advantage of some special alternatives. These options offer more opportunities for those with differing financial needs and objectives than are available through traditional kinds of insurance and annuities.

1035 Exchange Life Insurance To Annuity
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The 1035 Exchange

This is where the 1035 Exchange may come into play. Essentially, it is a section of the IRS’s tax code that was put into place to facilitate the transfer of funds from liquidated insurance policies into another insurance policy in a way that avoids the gains taxes usually assigned to transfer money. When you follow specific guidelines of the 1035 Exchange rules, you, as a policyholder, may transfer your funds from existing policies or annuities to new insurance policies and annuities.

Of course, your circumstances may determine the type of transfer you will need. Some policyholders may end up transferring more than once between different types of insurance policies and annuities. Each type of transfer, in turn, has specific rules that govern its usage. This means that you may need to know the basics in order to make a smart decision about a 1035 exchange.

Changing From Insurance To Annuity

When you have a situation where you don’t want or require death benefits, you can institute a transfer of that life insurance policy to an annuity. It’s important to point out that under the 1035 Exchange guidelines, if you choose to transfer from a life insurance policy to an annuity you cannot turn around a change back to an insurance policy. The exchanges may only be conducted in one direction. In other words, you may not move from annuity to an insurance policy. You can also transfer to a new annuity account. If you attempted to transfer from an annuity to life insurance you could end paying gains taxes.

Additional Thoughts on 1035 Exchanges

By using the 1035 Exchange you gain added flexibility via tax-deferred accumulation since you won’t be required to pay taxes on what you’ve built up in one account. You can move smoothly from an old or outdated account to a new one that better meets your current needs.

The rules behind this provision can be complicated and there may be other fees that you might incur during the exchange process, such as surrender changes from your original policy. It may be wise to consult with some kind of financial professional or advisors before you decide to take this kind of step. They should be able to outlines the pros and cons of this type of measure so you know what value may be available to you. Why not take advantage of the 1035 Exchange? It may really benefit you and your family in the long run.

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{ 1 comment… read it below or add one }

Ed @ Making Extra Money December 5, 2010 at 11:03 pm

This is a good article, but kind os mind boggling. My Dad retired last year and have been looking for something with added benefit for him and my mom. Would something like this help them?

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