by: Mark D. Milbrod, CLU
Principal, Agent Support Group-8-17



We have all facilitated cases with 1035 Exchanges.  They are very simple.  A client has an old life insurance contract with cash surrender value.  We roll that money into a newly issued contract, carry over the cost basis and negate any taxation at the time of the transfer.  The benefits of the lump sum coming over usually acts as a subsidy to either lower future outlays, increase guarantees and in some cases rescue some under water or heavily leveraged contracts.

But in today’s robust product environment, we can add an additional layer of benefits that was previously not available.  There are a number of life insurance products today that offer Long Term Care or Chronic Illness Benefits.  These products come in a lot of different flavors:

  • LTC Rider (LTCR) add-ons for Guaranteed UL, Indexed UL or Whole Life
  • LTC Rider (LTCR) add-ons for Survivorship Guaranteed UL or Survivorship Whole Life
  • Chronic Illness Rider (CIR) add-ons for Guaranteed UL, Indexed UL or Whole Life
  • Blended Life Products (Single Pay or Limited/Flex Pay)
  • LTC Riders on Non-Qualified Annuity Contracts


Individual or Survivorship Products w/LTCR or CIRs:

For the most part, the life insurance contracts with an LTCR or CIR allow a facility to accept IRC §1035 Exchanges from any qualifying product.  The qualifications are usually limited to the new policy bearing the same Insured/Owner as the policy releasing the funds.   This should make the conversation fairly simple with most prospects.  If they have an existing product that offers only life insurance benefits and it has a Cash Surrender Value, you can provide another layer of living benefits through the LTCR & CIR that had not previously existed.  In the majority of cases, you will often lower the out-of-pocket cost to the policy owner, but even if the new on-going premium was the same or slightly higher, you are providing so much more in terms of benefits that the client will likely go forward with the exchange.


Blended Life Contracts:

Another area where there are high potentials for sales is in the Blended Life arena.  These contracts also allow for IRC §1035 Exchanges.  These products are more LTC focused and offer a modest life insurance benefit while still meeting the definition of life insurance under IRC §7702.  These types of sales are typically unwritten on a non-medical basis via a client phone interview and a series of field underwritten knock-out questions.  A good prospect for this type of product may be an older client with an in-force life insurance policy(ies) with cash value but a shift in need that is less life insurance focused and more LTC driven.


Annuity Products:

The last area to focus on is the annuity marketplace.  There are annuity contracts that can offer LTC benefits as well.   These types of transactions have a few more rules associated with them, but are classified as viable annuity to annuity exchanges under IRC §1035.  The key component is that these contracts have the same taxation as it relates to withdrawals and death benefit payouts to beneficiaries.  However, the true benefit comes in the form of potential tax-free LTC payouts.


When it comes to IRC §1035 Exchanges, there are so many benefits that you can offer your clients.  Today however, with the Living Benefits available, there are additional opportunities that are often overlooked.  The idea of adding on Long Term Care or Chronic Illness benefits to the exchange can surely start some great conversations.  Based on experience, this is something that is not well known, not only amongst professionals in our own industry, but with referral sources such as Estate Attorneys, CPA’s and Trust Officers.


Don’t miss this opportunity.  By adding the LTC/§1035 Exchange topic to your daily discussions, you can boost your sales by showing your clients and prospects how they can Have Their Cake and Eat it Too.




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