In a 1035 Exchange, does the former policy need to have cash value in order for it to qualify?

In a 1035 Exchange, does the former policy need to have cash value in order for it to qualify? Is it easer just to cancel it and write a new one?

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  1. Lexi on April 5, 2013

    In a 1035 Exchange, does the former policy need to have cash value in order for it to qualify? Is it easer just to cancel it and write a new one?

    In a 1035 Exchange, the former policy must be a cash value policy and be of equal or lesser cost basis than the new policy in order to qualify. A simple way to look it is if the policy doesn’t have cash value there is nothing to transfer to a new policy. If a 1035 Exchange is not used, the insured may pay a capital gains tax and any applicable surrender charges on the cash value of the policy upon cancelation.

    The purpose of a 1035 Exchange is to allow a policy owner to exchange the proceeds of one policy to another without paying a required tax on any gain from the initial policy. Without a 1035 Exchange, the policy owner would be required to pay a tax on the cash value (gain) from the initial policy before they can apply for a new policy, therefore taking a loss to their gains.

    Another thing to consider when looking into exchanging policies or applying for a new policy is the health status of the insured. When canceling an insurance policy and applying for a new one, the insured will need to get their health reevaluated with the new insurance company, which can sometimes complicate things if their health has changed since the application for the original policy.

    If you think you may need additional life insurance, try our Life Insurance Needs Estimator, which can help you determine a recommended amount of coverage based on your debt and income profile.

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