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What is a 1035 Exchange?

1035 Exchange is related to tax code which allows the direct transfer or exchange of same or similar insurance products, endowment policy or annuities to another type of insurance, endowment policy or annuity. The main purpose of the transfer is to avoid payment of taxes that may be due when the owner finally redeems the financial product.

The name 1035 exchange comes from provision of Section 1035 of the IRS code where the rules of 1035 are based. Ordinarily, any exchange of financial product will need tax payments but the ruling of 1035 exchange allows people to have an exchange without generating any taxes. However, customers are advised to study first if their financial products are under the classification and passed the criteria of the rules of IRS.

There are several purposes why people choose to exchange. First, it removes the source of ineffectiveness by giving the consumers the chance to exchange their assets without any taxation.

Second, it boosts the services and goods of insurance companies, which sells financial products. Insurance companies will try to outshine each other by giving the best products to the market since it will not be a good idea for them if the consumer decides to exchange their investment to another insurance product. Typically, consumers decide to exchange their investment instruments to another product but with the same company. However, exchanging it to another investment instrument to another company may not be a good sign since it means that the insurance company is not giving a good service.

In addition, another competitive offering from other insurance company may also offer better investment, which can be higher than the existing one. If the financial strength of existing policy, endowment or annuity is not that stable, the plan holder may decide to transfer it to another company which is more stable.

For tax purposes, the existing insurance company will give the needed information to compute the taxes involved when the consumer decides to transfer and withdraw any cash to the newer company.

Verification Process

The exchange to the newer company is generally easy as long as the verification process is approved. The verification process only involves proper identification and that the owner of the existing policy remains the same. The terms as well the policy owner should stay the same to get approval. Changes in any of the name or terms may get rejection for the exchange.

Characteristics of 1035

 1035 Exchange is approved when the products to be exchange are the similar kind of assets. If you have existing life insurance, you can only transfer it to another life insurance to another company if it follows the same terms.

If you have, an existing endowment policy and you can only transfer it to another endowment, the same way with annuity. Exchange of the same type of annuity is allowed if you will exchange it to another annuity. You cannot exchange it to another type of annuity if they are not the same.

The exchange is also approved as long as the insurance products are not non-qualifying. They must not hold inside a tax advantage plan like 401(k) or IRA.

In the end, there are so many annuities offered in the market, you need to be careful in choosing which type of annuity is for you. However, if you find that your existing annuity is not secured in existing company, you may decide to transfer it to another more stable.

To get the highest eligible and stable rate, enter your ZIP at the top of this page and answer to some basic questions. Answering the question will allow you to receive free quote from our multiple providers with different rates depending on your individual circumstance and situation.