46 / Is there any tax liability when a joint and last survivor policy is exchanged for a single life policy on the surviving insured?

In a private ruling, the IRS has sanctioned IRC Section 1035 treatment for the exchange of a joint and last survivor life insurance policy, following the death of one of the insured persons, for a universal variable life insurance policy that insures the survivor. The IRS noted that at the time of the exchange, both policies were insuring the same single life and that the new policy would better suit the policy owner’s needs because it was less costly.¹ The IRS reached the same conclusion in another private ruling in which a second-to-die policy was exchanged after the death of one insured for a policy insuring only the survivor.²