Conversion or Exchange of a Life Insurance Policy

Conversion or exhange of a life insurance policy

A 1035 exchange or conversion is the process of exchanging an existing insurance policy for a new one. These exchanges happen with the help and guidance of a licensed insurance agent and are regulated by the state in which you live. Since an exchange or conversion represents the purchase of a new policy, it's important to know some of the details of what an exchange or conversion is and how it works.

Types

A conversion can be made from one life insurance policy to another. This would include a permanent to term insurance policy, a term to permanent policy, a permanent to another permanent policy and a term to term policy exchange or conversion. However, life insurance policies can also be exchanged or converted to annuity contracts, not just other life insurance policies. This is allowed because annuity contracts are also considered insurance policies.

Exchange Paperwork

An essential aspect to any life insurance policy exchange or conversion is the 1035 exchange paperwork. This paperwork allows you to replace your existing policy with a new policy. You will also have the opportunity to transfer cash values from your existing policy, if any, into the new policy with no income tax due. New York State requires additional paperwork. Regulation 60 paperwork provides the policy owner an analysis of the old policy and compares it to the proposed new policy so that the policy owner can make an informed decision about which is better.

Time Frame

Exchanging or converting a policy can take 30 to 45 days. In New York state, the time period for an exchange or conversion can be longer. Because of Regulation 60, the process is typically 2 months (60 days), but may be longer. There is no legal way to circumvent this time frame while doing a conversion or exchange.

Misconceptions

A common misconception is that there will be taxes due on an exchange or conversion, which involves the transfer of cash value policies. This is only true if the conversion or exchange is not a real conversion or exchange. For example, in an attempt to circumvent the law, some insurance agents may try to show you how to surrender your policy and purchase a new policy. In this instance, the surrender could trigger income tax due on the cash value of the policy. However, a true exchange always involves the use of 1035 exchange paperwork and will not cause income tax to be due on the conversion or exchange into a new policy. A conversion will require the same or similar paperwork (depending on your state of residence) as an exchange.

Considerations

Exchanging or converting your policy only makes sense, for the most part, when your existing policy is unaffordable. You should always examine any possible benefits with your new policy and compare those with your existing policy. If your old policy offers lower premiums than the new policy, you are likely better off with your existing policy. Of course, other considerations can be taken into account. For example, if your cash value is being depleted due to rising insurance costs (as is the case with older universal life insurance policies), you may want to exchange your old policy for a newer one, regardless of the premium costs for the new policy.