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A Unique and Advanced Way to Save Money

It seems like everyone these days are trying to save money and reduce expenses, but everyone overlooks this unique and advanced way to save some money while providing further protection for your family. Don’t worry it is not illegal, nor is it on late night commercials/infomercials.

1035 Exchange of Insurance Contracts

As the IRS highlights,

The legislative history of § 1035 states that exchange treatment is appropriate for ‘individuals who have merely exchanged one insurance policy for another better suited to their needs and who have not actually realized gain.’

Put simplistically, you can replace that old policy that was sold to you years ago, for a new product without incurring any taxes.

Before I get the expected arguments about buying term and investing the difference, I am huge proponent of permanent life insurance policies for various reasons (advanced estate and gift planning down to the simplistic reason of building up a cash deferred reserve) and I promise I will defend it against those term fans if need be, but that is not point of this post.

The point of this post is talk about (1) you may want to talk to your insurance/financial professional and (2) how a 1035 is done.

Why Do a 1035 Exchange:

  • You are in better health
    • You stopped smoking,
    • You lost weight
  • Newer products
    • May have higher dividend
    • Better mortality rates – think how many people died earlier back in the 70’s when you bought that old policy?
  • Newer Riders
    • Think Long Term Care Rider
    • Waiver of premium if you become disabled
  • Reduce exposure to risk
    • That Variable policy doesn’t suit your risk tolerance anymore
  • You don’t feel like paying premiums anymore
  • You want more death benefit
  • Your company is questionable at best
    • HELLO AIG Holders!
  • You have outstanding loans and a newer product has better terms

How do you 1035 a Life Insurance Contract

Your insurance agent will should take you down the path but here are the 5 requirements

  1. Transaction is an exchange
  2. Exchange is qualified – Only certain insurance products can be exchanged with other insurance products.
  3. Same insured – same primary annuitant/insured
  4. Proper sequence
  5. Same owner

Unlike 1031 exchanges (real property) or an IRA Rollover you can’t identify the product/company later on and make the exchange or deposit.



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