Alternatives to Section 1035 Exchanges

There is an alternative to almost every tool or technique in life insurance planning, each with its attendant advantages and disadvantages. Keep in mind that 1035 exchanges have a number of disadvantages that should be carefully considered, such as: (1) possible surrender penalties on the old contract; (2) a new surrender charge period on the new contract; and (3) new incontestable and suicide periods on the new contract. As an alternative to a 1035 exchange, planners should consider the judicious use of cash dividend options or reduced paid-up insurance. Cash dividends can be used to purchase new insurance coverage. Placing an old policy on reduced paid-up or extended term makes it possible to free up significant premiums that can then be used to purchase new coverage without surrendering existing contracts or facing the uncertainty inherent in an unsettled area. In addition, an internal 1035 exchange with the same life insurance carrier may be a better option for the client.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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