Alternatives to Section 1035 Exchanges

Alternatives to Section 1035 Exchanges

There is an alternative to almost every tool or technique in life insurance planning, each with its attendant advantages and disadvantages. Keep in mind that 1035 exchanges have a number of disadvantages that should be carefully considered, such as: (1) possible surrender penalties on the old contract; (2) a new surrender charge period on the new contract; and (3) new incontestable and suicide periods on the new contract. As an alternative to a 1035 exchange,…

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Major Tax Traps of Section 1035 Exchanges

Major Tax Traps of Section 1035 Exchanges

Understanding the tax traps of Section 1035 exchanges will help consumers make a wiser, and more educated, decision in their policy purchases. The following is a checklist of the major tax traps incurred in section 1035 exchanges: Failure to meet same insured requirement – The tax deferred nature of a section 1035 exchange presumes that both the old and the new contract are on the life of the same insured. In the case of an…

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Details Matter: The Mechanics of Section 1035 Exchanges

Details Matter: The Mechanics of Section 1035 Exchanges

If a client were to sell property to one person and use the proceeds from the sale to purchase new property from a second party, the first transaction would be considered a sale rather than an exchange. The IRS will follow this same reasoning even if the client intended from the beginning to use the proceeds from the first transaction to purchase the second asset. How does this reasoning apply when the asset is a…

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Income Tax Considerations of Section 1035 Exchanges

Income Tax Considerations of Section 1035 Exchanges

The Internal Revenue Code provides generally that all income, from whatever source derived, is reportable by the recipient. So if an existing life insurance policy or annuity is surrendered, the gain, i.e., the excess of the amount received over the policyowner’s basis, is taxable at ordinary rates. Gain can therefore be thought of generally as the excess of amounts distributed under the policy over the amounts paid in. For example, assume a client surrenders a…

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An Introduction to Section 1035 Exchanges

An Introduction to Section 1035 Exchanges

Insurance programs must be flexible enough to change as an insured’s financial status, family responsibilities, and business needs change. Furthermore, as new types of policies are developed, ethical agents will seek, when appropriate, to match the product to the problem. If a new product solves the problem in a more cost effective manner than the old product, a client should be apprised of the opportunity and should be given the chance to exchange the old…

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