What is a 1035 exchange for long-term care insurance?

A 1035 exchange (named for Section 1035 of the tax code) is a tax-free transfer between like insurance products. Thanks to the Pension Protection Act (effective 2010), you can now exchange a life insurance policy or annuity directly into a tax-qualified long-term care or hybrid policy without triggering income tax.

The classic use: you have an old annuity with built-up gains, or a cash-value life policy you no longer need. Withdrawing the gains would be taxable — but moving them through a 1035 exchange into an asset-based long-term care policy lets those dollars fund care tax-free.

The transfer must go directly from one insurer to the other (you can't take the money and redeposit it), and the details matter, so work with your agent and tax advisor. It pairs naturally with hybrid coverage.

General information only. This is educational and not insurance, legal, tax, or financial advice. Rules and products vary and change — confirm the specifics with a licensed professional.