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An existing life insurance policy is exchanged for a new life insurance policy or an annuity. In both cases, the owner and insured may not change (or the annuity remains payable to the same person). Per tax code, the policyholder may not receive any money from the exchange; cash value must go directly from former insurance company to new insurance company.
1035 Exchange: Steps
- Application and 1035 Exchange form submitted to new insurance company. Policy owner continues to pay premiums and loan interest payments due on old policy.
- Paramedical exam and underwriting.
- Approved by insurance company. Accepted by policy owner.
- New company contacts old company to arrange surrender and transfer of cash values (this process can take several months).
- Old company mails check to new company for cash surrender value amount.
- New company issues new policy and LLIS sends to policy owner.
- Policy owner signs policy delivery receipt form.
1035 Exchange: Why?
- Any taxable gain or loss is carried forward into the new policy.
- The cash value transferred from the old policy receives favorable treatment under TAMRA (7-Pay) modified endowment regulations, meaning the cash value rolled over is not counted as new premium for the new policy.
- When rolled into a new guaranteed life insurance policy, the cash values may be sufficient to provide a "paid-up" policy and lower costs since the insured has just been found healthy in a medical evaluation.