Understanding The 1035 Exchange With Life Insurance

When you have a life insurance policy, you need to understand all of the terms and benefits associated with it. One potential decision you will need to make is whether or not to take advantage of a 1035 exchange. This article will explain what a 1035 exchange is, how it might apply to your various types of life insurance and what you can expect from the overall process.

Understanding the 1035 exchange

A 1035 exchange is when you replace your current life insurance policy with a different one without having to worry about the potential tax penalties that you would usually contend with. You can compare this to refinancing a mortgage, because it allows you to restructure your agreement with better benefits, reduced fees and more options in front of you in terms of investments. Some examples of this include changing an annuity contract into one with identical annuitants, changing a life insurance policy for a different policy or swapping out endowments.

Different kinds of life insurance policies

In order to understand what you can do with a 1035 exchange, you will need to figure out the type of life insurance policy you have and which one you would like to switch to, in order to make sure it benefits you. The following are the most common types of life insurance policies:

  • Whole life insurance – this is a type of policy that covers the policyholder for their entire life. These life insurance policies can also come with savings plans and cash value, including dividends.
  • Universal life insurance – this is similar to whole life insurance, but has more flexibility in premiums and coverage.
  • Term life insurance – this is a life insurance policy that covers the policyholder for a certain time.
  • Variable life insurance – this is a type of whole life insurance that has fixed premiums for the duration of the plan.

Figuring out if a 1035 exchange is for you

To determine whether or not you would like to take advantage of a 1035 exchange, think about the following circumstances:

  • Consider your health and whether it has changed from the time that you initially filed your life insurance policy
  • Think about the way that interest improves with the new policy
  • Be aware that you might have to pay higher premiums by switching
  • Weigh the overall benefits that you will receive with the new policy, as opposed to those provided by your current policy

Follow these tips so that you call your insurance company to see if a 1035 exchange is right for you.


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