We closed an insurance policy and used the all of the cash value to purchase another insurance policy. How do we account for this on our taxes since this should be a roll-over and not income?
Your administrator would need to do a 1035 exchange to transfer your original insurance policy to your new insurance policy. The tax code says that the old insurance policy must be exchanged for a new policy—you cannot receive a check and apply the proceeds to the purchase of a new insurance policy.
A 1035 exchange is a rule that permits tax free transfers of “like assets” under the tax code. Like asset in this case means insurance product to insurance product. Specifically under 1035: cash value from a life insurance contract can be exchanged into a new annuity or life insurance.
- You would receive form 1099-R - IRS.gov from your life insurance administrator.
- Your form 1099-R Box 7 would have Code 6 - Section 1035 exchange (a tax-free exchange of life insurance, annuity, or endowment contracts).
- As you enter your 1099-R, TurboTax will recognize the Code 6- Section 1035 exchange and not tax it. Click on Where do I enter my 1099-R?