| |
|
|
... |
|
Term Life Insurance by Top
Rated Companies
More term companies
equals the best opportunity to obtain the lowest term quote!
 |
1035 Life Insurance Exchange Guidelines and Exchange Procedures
|
|
|
A Section 1035 exchange permits a policy-owner to transfer
the cash value from one life insurance or annuity contract to
another without income tax consequences, provided proper
procedures are followed and the policy-owner does not receive
any property in the exchange.
Even if there is no gain in the policy to be exchanged, a 1035
exchange permits the adjusted cost basis of the old policy to be
carried over to the new policy. To qualify, however, the insured
and owner must be the same on both policies and the exchange
must involve:
• A life insurance contract for another life insurance contract
or an annuity contract.
The exchange of two single life policies for a policy insuring
two lives (survivorship policy) does not qualify as a
non-taxable exchange. The IRS has permitted an exchange of a
survivorship policy where the first insured has died for a
single life policy insuring the life of the surviving insured.
• An endowment contract for an annuity contract.
• An annuity for an annuity. An exchange of an annuity for a
life insurance policy is not a 1035 exchange and may result in
income tax consequences.
Note: These rules do not apply to any exchange having the effect
of transferring property to any non-United States person.
Product: In order to accommodate the transfer of values, the
life insurance product must be able to accept unscheduled
deposits.
The product for an exchange of a policy "with no outstanding
loan" should be either a Universal Life or Whole Life with Paid
Up Additions Rider plan of insurance.
Underwriting: Full evidence of insurability based on age and
amount applies.
Replacement Compliance: Full compliance with appropriate state
replacement regulations applies.
Procedure: In order to process an exchange, the field
representative should obtain:
1. The completed state-specific application with wording in the
"Special Instructions" section to indicate "This is a 1035
exchange." Suggested wording to avoid amendment:
• 1035 Exchange proceeds only; or
• 1035 Exchange proceeds plus planned premium; or
• 1035 Exchange proceeds plus planned premium plus lump sum
deposit of $_____________; or
• 1035 Exchange proceeds plus lump sum deposit of
$_________________
2. Evidence of insurability based on the insured’s age and
amount applied for.
3. The applicable 1035 Exchange Form should be signed (original
signature (s) only) by the owner (s), collateral assignee, etc.
This agreement contains a number of conditions and should be
read carefully by the owner (s) before signing.
If the owner is a corporation or other business entity, provide
the full name of the entity followed by the signature and title
of the authorized party. If the owner is a trust, provide the
full name of trust and trust date, followed by the signature (s)
of the trustee (s). Insert the title "Trustee (s)" following the
signature (s).
4. A copy of the trust agreement where applicable.
5. The old policy or policies should be returned with the
applicable Exchange Form.
6. All state-specific replacement paperwork.
7. Conditional Insurance Receipt or Temporary Insurance Receipt
(issue state specific) if money is taken with the application.
Upon receipt of the above requirements, the following will
generally occurs:
1. If the Company approves the new policy for insurance in a
standard or better rating class, or in a rated class that had
previously been requested and accepted in writing, the Company
will request surrender of the old policy.
2. If the new policy is approved with a rated premium, the
Company will await the confirmation of acceptance by the owner
prior to beginning the surrender process.
3. The Company will issue the new policy for delivery upon
receipt of the 1035 proceeds.
4. If surrender cannot be effected, the old policy will be
reassigned to the policy-owner and the Company’s obligations
under the exchange agreement will terminate.
5. If the policy-owner declines acceptance, or returns the new
policy under the "Free Look" provision, the Company will, in its
discretion, either cooperate with the policy-owner in attempting
to reinstate the policy (ies) with the prior insurer or deliver
all payments made with respect to the new policy to the
policy-owner.
Other Issues:
• Insured/Annuitant and owner must be the same on both
policies/contracts (before and after exchange.)
• If the policy is owned by a trust, original signatures of ALL
trustees as owner are required, together with their title (s).
• Complete name and date of trust must be included.
• Submit a copy of the trust showing section listing trustees.
• If owned by a business entity, include title of party signing
on behalf of the business entity and complete company name.
• All external exchanges average 30 days of processing time from
receipt of paperwork in good order at the exchanging company.
Some companies require company specific forms
AIG--- American Express--- American Genera---l AVIVA--- Canada
Life--- Conseco--- Farmers & Traders--- First Investors--- Great
West--- Hartford--- IDS--- Lincoln Security--- Mass Mutual---
Modern Woodmen National Life--- Northwestern Mutual--- Phoenix
Life--- Presidential--- Principal--- Prudential--- Reliastar/ING---
SBLI--- US Life
The listing provided is not comprehensive and is subject to
change. We recommend that you contact the existing insurer to
obtain exchange requirements prior to submitting documents.
Special Notes
1. Approximate processing time for exchanges is 30 days from
receipt of paperwork in good order at the company that issued
the contract to be exchanged. Clearly, conservation will be
attempted, and you should be prepared for a significant delay
before the surrender proceeds are received and applied to the
new policy.
2. An exchange of a life policy issued prior to June 21, 1988,
that would be a modified endowment contract if issued after the
effective date of IRC Section 7702A (i.e., fails the 7-pay
test), will lose its grandfathered status. It is unlikely that
such an exchange will be in the client’s best interest.
3. The new insurer will not pay premiums if any become due on
the old policy (s). If the client wishes assurance that there is
no break in coverage before issue of the new policy, the client
should be instructed to pay the premiums on the in-force policy,
although it might be prudent to pay the minimum modal permitted.
4. Some insurance carriers will not transfer the outstanding
loan balance on life insurance products. Such carriers will
surrender the loan first, with the balance of the funds
transferred to the new policy. This treatment may create an
adverse tax consequence.
5. While 1035 exchanges allow for tax-free treatment, some
situations can result in immediate taxation. For example, the
receipt of any cash or "boot" not poured into the new contract
will result in income tax to the extent of any gain in the
contract.
A Word of Caution
We encouraged the parties involved to seek the independent
advice of a competent tax advisor before proceeding with any
1035 life insurance exchange.
Related Topics:
|
|
|
|
Find us on Facebook 
Find us on Google+
Follow us on Twitter
