1035 Exchanges: What Are They and How Can They Help?

By Nicole Young on March 12, 2024

Article published in Greet La Grange Magazine, written by Private Vista’s Carrie Shoener

Once upon a time you needed life insurance with cash value. Maybe you wanted to be able to pay off the mortgage or fully fund your kids’ college if something happened to you. Perhaps you purchased an annuity with riders that you don’t require anymore. This situation isn’t uncommon. Products that were helpful can become burdensome and unnecessary as our wealth grows.

What can you do with a life insurance policy or annuity that you don’t need anymore? Depending on your original investment, there are a few choices available:

Your cost basis could be above the current value of the policy. When this happens, it is possible to take out the cash value without any tax impact. If the policy is in “surrender,” consider waiting until this period is over to avoid fees.
If the value of the policy is above your cost basis, surrendering the policy may result in tax consequences. This is where a 1035 exchange is helpful. A 1035 exchange allows for a tax-free exchange of an existing annuity contract, life insurance policy, or long-term care product into another “like kind” product. There are three types possible:
- Life Insurance to Life Insurance
- Life Insurance to Annuity
- Annuity to Annuity
- Note: You cannot exchange an existing annuity for life insurance.

After making the exchange, the cost basis of the original policy becomes the cost basis of the new one.

This solution allows investors to keep the tax-deferred growth in a more cost-efficient vehicle. For clients who originally paid for many features that they no longer need, this can represent savings by exchanging into a paid-up policy or one with a lower premium. Some individuals may need features that they did not consider when they were younger. Using life insurance to fund long-term care is an increasingly popular strategy as more people realize the need for additional insurance in this area.

Prior to executing a 1035 exchange, meet with a professional trained in analyzing the risks and benefits associated with your circumstances. These products can be complicated and should be researched before action is taken. If this sounds like something you need help with, don’t hesitate to reach out to us at Private Vista.

Article written by, Carrie Shoener, MSF, Private Vista Advisor

Private Vista, LLC is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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