A 1035 exchange is a provision in the tax code that most people have not heard about. It allows for the direct exchange of accumulated funds in a life insurance policy or annuity for another life insurance policy or annuity without creating a taxable event.
Please note that a 1035 exchange is a sophisticated tax maneuver and most insurance agents and financial planners are not familiar with them, and don’t know how to execute them.
If you’ve had a life insurance policy for a long period of time, it’s worth checking to see what it’s accumulated cash value is. If there’s enough accumulated value in your policy, you could perform a 1035 exchange and trade it up for a significantly bigger policy, without having to write a check for a new premium.
For instance, if you have a life insurance policy that has a cash value of $200,000 and a death benefit of $400,000, you could exchange your existing policy for one with a significantly larger death benefit, using your old policy’s cash value as the premium.
This provision in the tax code is not to be confused with a 1031 exchange, which is for real estate.