Tax Facts

45 / Is there any tax liability when a policyholder exchanges a life insurance policy insuring one life for a policy insuring two lives?



In a private ruling, the IRS concluded that exchanges of policies insuring a single life for a policy insuring two lives do not qualify for nonrecognition treatment under IRC Section 1035. The IRS reached this outcome in all of the following situations:
(1)     Spouse A exchanges a policy insuring only Spouse A’s life for a policy that insures the lives of both Spouse A and Spouse B;

(2)     Spouse A exchanges two life insurance policies, one of which insures Spouse A and the other of which insures Spouse B, for a single second-to-die policy insuring the lives of both Spouse A and Spouse B;

(3)     Spouse A and Spouse B jointly exchange separate policies each of which insures the life of one spouse for a single jointly-owned second-to-die policy that insures the lives of both Spouse A and Spouse B;

(4)     A trust owns and exchanges a policy insuring the life of Spouse A for a policy that insures the lives of both Spouse A and Spouse B; and

(5)     A trust owns and exchanges two life insurance policies, one of which insures Spouse A and the other of which insures Spouse B, for a single second-to-die policy insuring the lives of both Spouse A and Spouse B.1






1.     Let. Rul. 9542037.

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