What is a 1035 Exchange?


If you've ever owned a life insurance or annuity product that builds cash value, you might have wondered what your options are if you ever decide to cancel the policy if you are dissatisfied with the product or if the cash value growth is under-performing.

While it is possible to withdraw the cash value and pay surrender charges, there is a better option available to people looking to fund a new policy to replace their current one.

A 1035 exchange is a tax-free transfer of funds from a life insurance policy, annuity or endowment contract to a new policy. As a life insurance policyholder, a 1035 exchange allows you to transfer the cash value in your current policy to a new product with a different company.

Life insurance cash value can also be transferred to an annuity or life insurance product. However, annuities cannot be transferred to a new life insurance policy. If you are transferring an annuity, it must be transferred to another annuity.

How can a 1035 exchange be used to fund a hybrid policy?

Since hybrid policies are life insurance contracts, they are an eligible target for a 1035 exchange from another life insurance product.

If you need long term care coverage and you currently own a life insurance policy that has built cash value, a 1035 exchange allows you to conduct a tax-free transfer of cash value from a current life insurance policy to a new hybrid policy that includes LTC benefits in addition to life insurance.

By transferring money into a new hybrid policy, you can reduce your premiums on the new policy or even fund the policy fully with a single premium payment, depending on how much cash value is available for transfer.

This is ideal for people approaching retirement age and healthy enough that they can qualify for a new life insurance plan after going through medical underwriting. Many people know they need long term care coverage but are hesitant to purchase traditional long term care insurance policies due to the volatility of the market and drastic premium increases that have hit policyholders in the recent years.

Hybrid policies are a favorable alternative because they are provide stability. The premiums are guaranteed not to increase, and if you never need to use the LTC benefits, your beneficiary will receive a full death benefit.

However, you also want to consider the fact that if you do develop a chronic illness and use the LTC benefits provided in your hybrid policy, money will be taken from the death benefit. So if you still have a strong need for a guaranteed life insurance death benefit, you may need to look at buying a separate policy to ensure you are covered if you end up using LTC benefits from the hybrid policy.

At Hybrid Policy Advisor, our agents can help you work through these questions and find the solution that's best for you and your family. Every person's circumstances are different, so it's important to work with an agent who is dedicated to providing personalized guidance and recommendations.

Call 1-866-365-6558 to learn more.