1035 Exchanges: The Financial Industry’s Most Overlooked Power Move
When was the last time you evaluated a client’s insurance policy and thought, “This could be doing so much more”? If you’re not actively considering 1035 exchanges as part of your client strategy, you’re leaving serious value on the table. And worse—you might be letting clients languish in outdated, underperforming policies that no longer serve their needs.
Let’s break down how financial professionals can use 1035 exchanges strategically—not just as a sales tool but as a way to truly optimize financial plans, retirement income, and long-term security.
Why 1035 Exchanges Are More Than a Simple Policy Swap
A 1035 exchange, named after Section 1035 of the Internal Revenue Code, allows policyholders to replace an existing life insurance policy, annuity, or endowment with a new one—without triggering immediate tax consequences. This is a powerful planning tool, but many advisors either overlook it or misuse it.
The right way to use a 1035 exchange? To align a policy with evolving financial goals, lower costs, improve coverage, and maximize tax advantages.
The wrong way? To churn policies unnecessarily, pushing clients into new products for the sake of commissions. (Yes, we’re going there.)
Where 1035 Exchanges Shine: Practical Use Cases
Upgrading Outdated Life Insurance Policies
Many clients still hold onto old whole life or universal life policies that no longer align with their financial goals. Using a 1035 exchange, you can shift them into:Policies with lower fees and stronger performance
Indexed Universal Life (IUL) policies that hedge against inflation
Hybrid life insurance with long-term care (LTC) benefits
Enhancing Retirement Income with Annuities
Clients who purchased annuities a decade ago might be stuck with low interest rates and rigid terms. A 1035 exchange can move them into:Fixed Indexed Annuities (FIAs) that offer principal protection with upside growth
Guaranteed Lifetime Income Riders for retirement security
Lower-cost, high-growth annuities suited for today’s economic environment
Addressing Long-Term Care Needs
With long-term care costs skyrocketing, clients may need hybrid policies that offer both life insurance and LTC benefits. A 1035 exchange can transfer them from a standard policy into one that:Provides tax-free access to death benefits for long-term care
Combines LTC coverage with a strong cash value component
Prevents lapsing policies from becoming worthless over time
The Industry’s Dirty Secret: When 1035 Exchanges Are Used Unethically
While 1035 exchanges can be a game-changer, they’ve also been a breeding ground for high-commission-driven churn. Some agents aggressively push exchanges that benefit them more than the client.
Regulatory Scrutiny is Rising: The NAIC’s best interest standard for annuities means advisors must now justify exchanges based on the client’s financial situation, not just sales potential.
Clients Are Getting Smarter: More consumers are aware of “advisor churn” tactics, and they’re demanding better transparency.
Your Reputation is on the Line: Ethical advisors who use 1035 exchanges correctly will stand out in a field where trust is increasingly hard to earn.
Your mission? Stay ahead of the curve. Use 1035 exchanges strategically, not opportunistically.
How to Implement 1035 Exchanges the Right Way
Assess the Policy First – Does the current policy still meet the client’s needs? If not, a 1035 exchange should be the last option, not the first.
Align with the Client’s Goals – Ensure that the new policy offers tangible benefits like lower costs, higher cash value, stronger growth potential, or enhanced benefits.
Run the Numbers – Don’t assume an exchange is always beneficial. Compare surrender charges, premium costs, fees, and long-term growth potential.
Document Everything – With regulators cracking down, ensure that all exchanges are justified and documented in line with fiduciary best practices.
Educate Your Clients – Transparency builds trust. Show them why the exchange makes sense and how it strengthens their financial position.
Final Takeaway: Use 1035 Exchanges to Elevate Your Practice
When used correctly, 1035 exchanges can be one of the most powerful tools in a financial professional’s arsenal. They allow you to course-correct outdated financial plans, provide clients with more tailored solutions, and reinforce your reputation as an ethical, forward-thinking advisor.
But with great power comes great responsibility. If you’re just swapping policies without a clear client benefit, you’re doing it wrong.
So ask yourself: Are you using 1035 exchanges to elevate your clients—or just to drive sales?
Let’s start using these strategies the right way—and set a new standard for ethical, client-first financial planning.
