Tax Free Exchanges
Indicated in the Internal Revenue code Section 1035 Exchange is the provisions that focuses on the life insurance of most policyholders in the event of sale or surrender of the policy which is considered to be not a good act to be done. In this case, the policyholder would be given the chance to replace his/ her policy not get a lower insurance without any need to pay additional income tax during the transaction.
With today’s mortality table, those clients of good health might tend to exchange their policy to a new one in a practical way of buying a lower premium rate while having more benefits on death even if the policyholder is older compared to the previous policy being issued. Studying how the 1035 exchanges functions will provide most planning professionals to get an idea on how to improve their sales, their exposure, their services and their positions to be a trusted adviser of the clients.
What does Section 1035 Exchange is all about?
Internal Revenue Code Section 1035 exchange is an exchange in terms life insurances policies that is tax-free. It can be a current life insurance policy be exchange for a new life insurance policy or anew annuity policy or a current annuity policy be exchanged for a new annuity policy.
Certain requirements are needed by the 1035 Exchange to be agreed upon. The policyholder should surrender the original policy value. If in case the insured will transfer to another insurance provider, then the policyholder should assign the policy to the new carrier followed by the necessary information from the surrendered policy since this will be carried over to the new policy.
Another requirement is that the insured life should be different right after the exchange. Changes include the policy structure, the death benefits and the premium rates.
Avoiding Tax Trap in the Exchange
The very common reason why many policyholders would opt to change their old annuity policy and old life insurance policy in exchange to a new annuity policy and new annuity policy is mainly because a new policy is most likely will perform much better compared to the old policies since nowadays there are already improvements when it comes to mortality which will provide a lower insurance cost, a lesser administration expense on the policy which will provide lower cost, improvements in the said underwriting with lower cost, improvements in the health of the insured which will trigger lower cost, improvements in interest crediting which will perhaps provide higher rates of interest as well as the interest linked in an index and to some cases, a worsened health which may cause higher than the usual annuity payments.
In short, people are making use out of life and are healthy enough to live longer thus the cost for a life insurance is much lower now compared before.
The tax trap is present in converting an old policy to a new policy. If in case there is a taxable gain established inside of the policy, then the made surrender is unfortunately taxable. By the 1035 Exchange, the cash values from the old policy will be carried over to the new purchased life insurance policy without any tax bestowed.