1035 refers to a provision in the tax code which allows for the direct transfer of accumulated funds in a life insurance policy, endowment policy or annuity policy to another life insurance policy, endowment policy or annuity policy, without creating a taxable event.
This transfer option is a like-kind exchange in which no tax is due at time of transfer. Typically, when a policy is transferred, the individual is taxed on any gain. However, if the policy is exchanged for another, Section 1035 of the tax code states that no gain or loss will be recognized. Consequently the transaction is not subject to any tax.
- A life insurance policy for another life insurance policy, endowment policy, or annuity;
- An endowment policy for an annuity; and
- An annuity for another annuity
If all the surrender proceeds from the original policy are transferred into the new policy and there are not outstanding loans on the original policy, there will be no tax on the gain in the original policy at the time of exchange. If the policy is surrendered without a 1035 Exchange, the gain from the original life insurance contract will be taxed as ordinary income (not capital gains). Please note that an annuity can NEVER be exchanged for a life insurance policy.
Business Uses of Life Insurance
RetirementIf this investment product has caused you sleepless nights, it's time to consider alternatives.
RetirementUnderstand how annuities provide several unique benefits, but many drawbacks as well, and identify the situations where they are not the best investment.
RetirementPairing insurance and an annuity sounds good, but do you really need this much coverage?
Managing WealthHow to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
RetirementThere are certain scenarios in which investing in insurance is a savvy move. But expect a big chunk of your money to go toward fees.
RetirementUnderstand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
RetirementThanks to a special tax code clause, you can surrender a variable annuity without paying income tax.
InsuranceIf you are banking on your life insurance payout being tax-free, you may be in for a surprise.
InsuranceTough times call for desperate measures, but is raiding your life insurance policy even worth considering?
InsuranceEndowment life insurance is a way to save for your child's college education. Here's a look at the positives of a policy like this.