"A 1035 exchange defers the internal build up of gains associated with the life insurance or annuity policies that would be taxable events," explains Jesse Slome, executive director of the American Association for Long-Term Care Insurance. "Using a 1035 exchange to purchase long term care insurance protection effectively ensures that the taxable gain disappears entirely." While the Association does not offer tax or legal advice the organization has published information to help educate more consumers about the tax advantaged planning technique.
"Individuals with an existing life insurance or annuity policy with a gain may wish to look into the advantages of a 1035 exchange," Slome explains. "Actually, a partial 1035 exchange is more common today," the leading long term care insurance
"Because not all insurance companies accept 1035 exchanges and because insurance policies can vary significantly from one insurance company to another, we strongly suggest consumers work with a knowledgeable professional,"
Under the new rules individuals can complete a "like-kind" exchange from an insurance or annuity policy directly to a qualified long-term care insurance policy. The new law stipulates that the long term care insurance policy must be a "tax qualified" policy as defined under IRC Section 7702B. "Today, the vast majority of policies meet these criteria," Slome adds. The rules also stipulate that the annuity policy must be non-qualified annuity. These are generally defined as annuities purchased with after-tax funds.
Established in 1998 as a non-profit trade group, the Los Angeles, California-based American Association for Long Term Care Insurance advocates for the importance of planning for long term care and supports insurance and financial professionals who market LTC insurance. To learn more about 1035 exchanges for long term care insurance