Is a 1035 Exchange Right For You?

Is a 1035 Exchange Right For You?

November 08, 2017

If you’re like most people, you purchased a life insurance policy years ago and haven’t thought much about it since. Well, you might want to. Contrary to popular belief, life insurance isn't a set-it-and-forget-it financial product. Not only has life insurance drastically changed over the past few decades, but your needs and life situation have probably changed just as much.

That being said, you can’t just cash in on your policy and go on your merry way without some serious tax implications. Enter the 1035 Exchange.

What Is A 1035 Exchange?

Your solution may come in the form of a 1035 exchange. Like most things in the IRS tax code, it seems complicated. Here is the gist of it: A 1035 exchange allows you to make a like-kind exchange of your life insurance policy. It is the process of directly transferring accumulated funds in a policy for another life insurance policy without creating tax consequences.

In terms of fine print, the two policies must have the same owner and the same insured, but you can consolidate two policies that are in your name into one in order to streamline your financial life. Finally, you are allowed to exchange one type of insurance for another, such as Whole Life for Universal Life.

Now that the financial jargon is out of the way, let’s look at some reasons you might want to consider a 1035 exchange.

Why Would I Want A 1035 Exchange?

A 1035 exchange may not be the right fit for everyone, but there are multiple scenarios where it could greatly benefit your financial situation.

Your Needs Have Changed

Maybe your finances are in such great shape that you no longer need the benefits of life insurance. But maybe, as you are nearing retirement, you are starting to worry about your health and how you will be able to afford long-term care if you need it. The cash value from your life insurance policy or annuity contract will be able to supply funding through a Code 1035 exchange for a traditional LTC policy without tax consequences.

Life Insurance Is Evolving

Life insurance has evolved into a much more valuable and robust risk management tool than it used to be. Today’s policies can cover chronic illness, premature death, and long-term care and can direct policy cash values among multiple options — not just the insurer’s general account. Many newer policies also offer increased investment options, so if you are looking for a financial product that incorporates updated tools, consider a 1035 exchange for your current policy.

Your Health Has Improved

Have you quit smoking or lost weight since you applied for your first policy? Have you swapped skydiving for golfing? All of these factors impacted the type of policy you were approved for and the premium you pay. If your health and lifestyle have changed, you may be able to switch to a new policy that is more versatile and offers a lower premium. In addition, improved health or mortality improvements across the general population may also result in insurance coverage at a lower cost.

Your Policy May Not Be Performing As Well As It Could Be

How do you know if your life insurance policy is performing as expected? When you purchased the policy, you were most likely shown a projection of values, but since then, have you ever seen an updated estimate? How would it compare to what you were originally shown?

It’s certainly possible that the policy is outperforming its original projection, but given the direction of the economy over the past few years, it’s far more likely that the policy has underperformed. If so, what might that mean for you and your plans for your loved ones? Now may be a good time to update your projections and ensure your policy is working for you.

Insurer Instability

Some financial companies seem to be shrouded in scandal. Do you have a policy with an insurer who has been facing recent instability or uncertainty? You can utilize a 1035 exchange to switch to a new insurer and find renewed peace of mind.

Is It Right For You?

Only you can answer this question, but make sure you include a financial process in your decision-making process. If you are unsure if your life insurance policy is the right fit for you, remember that the 1035 exchange gives you some flexibility. You can review your financial and insurance needs every few years knowing that if you ever need a change, you can pursue one.

With any sort of tax exchange opportunity, there can be obstacles and confusing details that come up along the way. If you are ready to utilize a 1035 exchange or if you want more information on the process and whether it would work for you, please contact me today at (626) 529-8347 or email me directly at

About Ricky

Ricky Biel, CRPC® is a wealth manager with Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at