Tax-Advantages

Section 1035 of the Internal Revenue Code

When taxes are due in April each year, it’s a good time to consider the tax advantages of life insurance.  It is widely known that cash value inside a life insurance policy grows tax-free, and the death benefit of a life insurance policy can be tax-free to the beneficiary.  However, life insurance products offer more nuanced tax advantages that can be beneficial.

As clients move through life, needs change, and their insurance portfolio should change accordingly.  Policies that were implemented in a client’s 40’s might not be needed anymore in their 60’s.  There are multiple exit strategies for clients to consider when editing their portfolio, and one that should be considered is executing a 1035 exchange.

Section 1035 of the IRS code allows for the tax-free transfer of surrender cash value from an existing life insurance policy to a new policy.  There are certain restrictions and caveats to navigate when completing a 1035 exchange, so working with a trusted insurance resource is important.

A 1035 exchange works best for permanent policies that were implemented 10+ years ago and have an excessive amount of cash value.  These policies can be exchanged for new policies that fit the current needs of the policy owner, as long as the insured(s) is healthy enough to qualify for new coverage.  A policy with a high premium payment might be exchanged for a policy with no illustrated premium.  A policy that is no longer needed for estate planning might be exchanged for a policy with a long-term care rider attached, turning the asset into a living benefit.

These options might enhance a client’s financial portfolio more than simply surrendering the policy.  A 1035 exchange moves the entire surrender cash value to the new policy on a tax-free basis.  Cashing out the policy for the surrender cash value will incur taxes on any gains, which in the instance of life insurance is any amount over the total premiums paid.

Contact us with any questions or opportunities to help you or your clients achieve identified goals.  This is what we enjoy doing for only a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.