You might be wondering, what does 1035 exchange mean? What is so unique about these sets of digits in relation to one making financial investments with an insurance company? Well, you are about to find out! Simply put, the digits 1035 refers to section 1035 (a)- (d) of the US IRS code regarding life insurance policies, endowment policies or annuity policies. Below is a statement of the code:
Title 26, Subtitle A, Chapter 1, Sub chapter O, Part III, Section 1035
States with “no gain or no loss shall be recognized on the exchange” of a life insurance policy for another life insurance policy or endowment or annuity policy.
Under the exchange 1035 code, an investor may exchange or swap his previous life insurance policy, endowment policy or annuity policy for a completely new one and the best part of it is that you can make this change completely tax free! An investor can change any of the above named policies which he has previously to a completely new one- (most definitely a better one) within the same insurance company or to a completely new insurance company. There are some provisions and guidelines covering the implementation of the exchange 1035 policy namely:
• The originator or annuitant of the old contract must also be the originator or annuitant of the new contract.
• This exchange only applies to life insurance policies, endowment policies or annuity policies.
• There must be an actual “exchange” of the old contract for the new one. The code also allows for the exchange of two or more old contracts for one new contract.
Why change policies you may ask? There are different reasons why making a 1035 exchange may be the best way to go as regards managing one’s financial investments. One major reason is that you can upgrade your investments to one that holds better advantages for you while avoiding tax implications. If the interest rates in your old contract are small compared to what is currently available in the market which may be more attractive, you may want to consider exchanging policies. The third reason is for wanting to change is that there may be new and better insurance products that offer more incentives or benefits than the previous one.
When one is nearing retirement, it may be a very good idea to review your previous annuity for retirement plans when one is nearing retirement, or when one swaps jobs. In spite of the fact that changing plans under the exchange code is advantageous, it may be time consuming as care has to be taken to ensure that the transfer is within the stipulated provisions. As with all other decisions regarding insurance policies and so on, it is advisable to seek professional help before taking decisions of this kind.
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