An internal 1035 Exchange refers to an application for a new policy that is intended to replace an in-force policy with an existing loan that was issued by MassMutual or its affiliates, (CM Life, MML Bay State, Large Corporate Markets), and transfer over all the cash value, carry over the loan amount, and cost basisThe amount of after-tax money that has been contributed to a policy. The reason the transferring of the Cost Basis to the newly issued policy is important when a 1035 Exchange transaction is involved, is because the client will receive a premium tax credit towards the new policy based on the premiums paid on the old policy. into the newly issued MassMutual policy via a tax-free exchange.
An external 1035 Exchange refers an application for a new policy that is intended to replace an in-force policy that was issued by an external carrier and transfer all the cash value, carry over the loan amount, and cost basis into the newly issued MassMutual policy via a tax-free exchange.
An exchange must be carried out correctly in order to be tax-free. Should the client exercise their right to return the new policy, the issuer of the Original Policy might not reinstate the Original Policy. This may result in adverse tax consequences and a loss of insurance coverage. The procedure outlined below will help you execute this transaction correctly.
- Policy Loan Transfer Request Form (F7010)
- Sales Illustration
- Absolute Assignment Form (P4051) - external
- Surrender Form (F6309) - internal
- Any State Required Replacement Forms
- There must be a Net Cash Rollover of at least $10,000. Note: This is the account value net (not including) of the loan.
- The New Policy must be a Legacy, VUL, or ULNAV policy. Guard products are not eligible due to the guarantees.
- The maximum loan amount to be carried over is $100,000,000.
Guard Requirements (applied for application)
- Producer’s Illustration must run without lapsing for at least 10 years using current rates.
- If the new policy will also be under the Surrender Endorsement Program, please verify that all criteria are met. Both loan carryover program and surrender endorsement program must meet the required criteria.
Legacy Requirements (applied for application)
- Producer’s Illustration must run for life without lapsing.
- Payment to cover the loan must be applied as a separate 1035 unscheduled ALIR
- The net 1035 monies received from the existing policy can be used to pay towards the new policy modal premium or be put into the ALIR or LISR as directed. However, the loan carry over amount must be put into a separate ALIR possibly creating two ALIR’s on a policy.
- Since there is a load charge on ALIR, a portion of the net 1035 proceeds may need to be deposited into ALIR. If this does not occur, there is a possibility that the policy could end up in an over-loan state. The process of having two ALIRs is manual.
- Underwriting needs to know the amount of the internal payment we are making into the unscheduled ALIR(s) so they can underwrite the correct amount of risk.
- A policy may qualify for the Surrender Endorsement program as well. Both the loan carryover program and surrender endorsement program must meet the required criteria of each program.