Many people own an annuity they bought years ago and never touched, or a life insurance policy they no longer need. A 1035 exchange can turn either one into long-term care protection, often without a tax bill.
What a 1035 exchange is
Section 1035 of the tax code lets you exchange one insurance or annuity contract for another without recognizing the gain as income at the time of the exchange. Since the Pension Protection Act took effect in 2010, that includes exchanges into qualified long-term care contracts and annuity/LTC combinations.
Common moves
- An old non-qualified annuity → an annuity with long-term care benefits
- An old life insurance policy → a hybrid life/LTC policy
- An annuity → a qualified long-term care policy
Why it can make sense
Gain inside an old annuity is normally taxed as income when you withdraw it. Exchanged into an annuity/LTC contract and used for qualified long-term care, that same gain can generally be paid out tax-free.
What to watch for
- Surrender charges on the old contract
- Losing valuable guarantees or riders on the old policy
- Qualified money (IRAs, 401(k)s) generally can't be 1035 exchanged into these contracts
- Exchanges must be done directly between insurers
We'll review your existing contract first and only recommend an exchange if it clearly improves your position. Consult your tax professional.
Questions
Can I use IRA money for asset-based long-term care?
IRA and 401(k) money can't be 1035 exchanged into these contracts. Some carriers offer designs that use qualified funds through taxable distributions spread over several years. We'll show you the tax trade-off.
Does a 1035 exchange restart surrender charges?
Usually the new contract has its own surrender schedule, and the old contract may charge a surrender fee. We compare both before recommending anything.