Tax-Free Exchange Of Insurance Products

Updated: 09 June 2023

What Does Tax-Free Exchange Of Insurance Products Mean?

Tax-free exchange of insurance products falls under the Section 1035 exchange of the Internal Revenue Code of the Internal Revenue Service (IRS). It is the act of swapping an insurance contract with a similar one to avoid taxes. For this transaction to be considered legal and recognized by the IRS, it must be documented with papers showing and finalizing the process of the swap. The products might be similar in features but not always in financial value. Usually, an insurance agent handles the exchange for both parties, namely, the person exchanging his or her contract and the person or company who provides the replacement.

Insuranceopedia Explains Tax-Free Exchange Of Insurance Products

For this to be considered a legal exchange, the person exchanging his insurance product must not receive cash or a check. Otherwise, the person "exchanging" will not be exempted from taxes as either the receipt of cash or money will be considered as "selling" and not "exchanging."

The IRS is also particular about what the term "similar products" means. First, as mentioned earlier, money must not be involved in acquiring the new insurance policy in exchange for the old one. Second, the products involved must be identical. For example, you swap a life insurance policy with another life insurance policy. Also, a life insurance policy can be swapped for an annuity, a system in which a company gives yearly payments to the product or policy owner, or as stipulated in the contract. However, an annuity cannot be swapped for a life insurance policy.

The reasons why a person will exchange his or her current insurance policy for another one can fall on either of the following:

1. The policy owner deems himself or herself healthy and thinks that he or she will not need treatment or hospitalization in the near future. Although the individual still opts for an insurance product or policy , it will be a policy where he or she pays less.

2. The benefits of the new product or policy are better than the one he or she currently owns.

Related Reading

Go back to top