Moving a Policy Between Carriers

Every long-dated structure eventually raises the same question. The carrier that looked right in year one has been acquired, or its platform has stopped growing, or the service has drifted, or the family's circumstances have moved somewhere the contract no longer fits. Can the policy be moved without dismantling twenty years of deferral?

Usually yes. Section 1035 is one of the more generous provisions in this area and it is used far less than it should be. But the exchange carries several traps that are unforgiving, one of which was clarified by final regulations only in July 2026, and it does something to the underlying investments that families rarely anticipate. This article works through what actually travels with the contract and what does not. It sits under our page on investment flexibility, and the mirror question of getting assets into a policy in the first place is covered in our article on funding with assets you already own.

The provision, and the one-way valve inside it

Section 1035(a) provides that no gain or loss is recognised on the exchange of, among other things, "a contract of life insurance for another contract of life insurance or for an endowment or annuity contract or for a qualified long-term care insurance contract."

Look at the direction of travel across the four paragraphs, because it is asymmetric and the asymmetry matters. Life insurance may go to life insurance, endowment, annuity or qualified long-term care. Endowment may go to endowment, annuity or qualified long-term care. An annuity may go to an annuity or qualified long-term care. There is no paragraph permitting an annuity or an endowment contract to be exchanged into a life insurance contract, and the regulation says so expressly: "This section and section 1035 do not apply to transactions involving the exchange of an endowment contract or annuity contract for a life insurance contract, nor an annuity contract for an endowment contract. In the case of such exchanges, any gain or loss shall be recognized."

So the valve opens one way. A family holding an annuity and wanting the death benefit treatment of life insurance cannot get there through section 1035, and anybody suggesting otherwise is describing a transaction that produces a tax bill.

The condition that ends most proposals: the same insured

Treasury Regulation section 1.1035-1 contains the sentence that decides more exchanges than any other: "section 1035 does not apply to such exchanges if the policies exchanged do not relate to the same insured."

That is a hard requirement and it cannot be drafted around. A family that wants to move value from a policy on a parent's life into a policy on a child's life is not doing a section 1035 exchange, whatever the paperwork calls it. The Internal Revenue Service reads it the same way, describing section 1035 as covering a policyholder's exchange of one life insurance contract for another "provided the insured is the same person under both contracts." That description comes from chief counsel advice, which under section 6110(k)(3) cannot be cited as precedent, so treat it as confirmation of the Service's reading rather than as authority.

A related but narrower condition applies to annuities. The regulation limits annuity for annuity exchanges under section 1035(a)(3) "to cases where the same person or persons are the obligee or obligees under the contract received in exchange as under the original contract." That obligee rule is written for annuities and is not a general condition.

What happens to basis, and what a policy loan does to it

Section 1035(d)(2) sends basis to section 1031(d), under which "the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange."

So the new contract takes a substituted basis. Investment in the contract carries over intact. Nothing is stepped up and nothing is washed out; the deferral continues.

The complication is the loan, and it deserves care because the answer is a conclusion rather than a holding. We looked for a published ruling or case addressing whether extinguishment of an outstanding policy loan in a section 1035 exchange produces boot. We did not find one, and we are not going to tell readers a ruling says something it does not.

What there is, is a chain of text in which every link names section 1035(a). Section 1035(d)(1) directs the reader, for exchanges not solely in kind, to section 1031(b) and (c). The regulation repeats the direction where the property received includes "other property or money." Section 1031(b) then recognises gain up to "the sum of such money and the fair market value of such other property" in an exchange that would be within section 1035(a). And the third sentence of section 1031(d) provides that "For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange."

Read together, loan relief in an exchange is money received, which is boot, which triggers recognition up to the amount of the boot and reduces basis accordingly. That is a statutory conclusion and we label it as one. Treasury Regulation section 1.1031(b)-1(c) adds that consideration given in the form of an assumption of liabilities is offset against consideration received in that form, which matters where the new contract also carries a loan, though we found no authority applying that offset in an insurance context.

The practical instruction is simple. Deal with the loan before the exchange, not during it, and know the number in advance.

The mechanic that fails the whole thing: taking receipt

This is the trap that catches people who have done everything else correctly, and there is a ruling squarely on it.

Revenue Ruling 2007-24 concerns an owner who asked the first insurer for a direct transfer to the second. The insurer refused and issued a cheque to the owner, who endorsed it over to the second company to buy a new contract. Held: the endorsement "does not qualify as a tax-free exchange under section 1035(a)(3). Instead, the amount received is taxable to the extent set forth in section 72(e)."

Two points of precision, because the ruling is frequently overstated. It is an annuity ruling, decided under section 1035(a)(3), and it should not be described as a life insurance holding. And it distinguishes Revenue Ruling 72-358 and Revenue Ruling 2002-75, both of which involved an actual assignment or a direct insurer to insurer transfer. The operative distinction is not the form of the paperwork but whether the taxpayer took receipt of the value.

Revenue Ruling 2002-75 is the useful companion. There the taxpayer assigned the contract to the receiving company, which transferred the entire cash surrender value directly and deposited it into a pre-existing contract with that company. That qualified, with basis and investment in the contract combining. It is the authority for consolidating into a contract the family already holds.

What follows for anyone actually doing this: the assignment must be executed before the old contract is surrendered, the value must move insurer to insurer, and the owner must never touch it. Getting the sequence wrong converts a tax-free exchange into a fully taxable surrender, and the error is not correctable afterwards.

Modified endowment status travels, and the statute says so in one line

Families sometimes hope an exchange will clean a contract that was overfunded in the 1990s. It will not, and the authority is express rather than structural, which is worth knowing because a great deal of commentary treats it as an inference.

Section 7702A(a) defines a modified endowment contract as any contract meeting the requirements of section 7702 which either was entered into on or after 21 June 1988 and fails the 7-pay test, "or (2) which is received in exchange for a contract described in paragraph (1) or this paragraph."

That is the carryover, in the definition itself. And note the self-reference at the end. Because paragraph (2) points at itself, the taint survives an unlimited chain of exchanges: a contract received in exchange for a contract received in exchange for a modified endowment contract is still one. There is no route out through section 1035.

Do not confuse that with section 7702A(c)(3), which is a different provision doing different work. It treats a contract with a material change as "a new contract entered into on the day on which such material change takes effect," with "appropriate adjustments" to the 7-pay test "to take into account the cash surrender value under the contract." That cash surrender value adjustment is why a large rollover into a newly issued contract can fail a fresh 7-pay test even though nothing carried over from a compliant old policy. It is the risk on the other side of the trade, and it is a design question for the receiving carrier's illustration.

The transfer for value question, answered in July 2026

Anything written on this before the middle of 2026 is out of date, which makes it worth setting out carefully.

Section 101(a)(2) limits the death benefit exclusion where a contract is transferred for valuable consideration, subject to two exceptions, and section 101(a)(3) switches those exceptions off where the transfer is a reportable policy sale. The question practitioners argued about was whether a section 1035 exchange was itself a transfer that could trigger the rule.

Treasury answered it. Final regulations at T.D. 10052, published at 91 FR 42351 on 9 July 2026 and effective the same day, address information reporting and the transfer for valuable consideration rules for section 1035 exchanges. The preamble reasoning is direct: a section 1035 exchange, in and of itself, is not a transfer of the newly issued contract received in the exchange, because property must exist before it can be transferred. The final rule removed the qualifying phrase that had previously carved section 1035 issuances out of the definition of transfer, because the carve-out was unnecessary.

Do not overstate what that achieves. The regulations are equally clear that a pre-existing taint follows the contract through the exchange. Treasury Regulation section 1.101-1(c)(3) provides that where an interest previously transferred for valuable consideration in a reportable policy sale is exchanged in a section 1035 exchange, "the new interest is treated as an interest in a life insurance contract that previously was transferred for valuable consideration in a reportable policy sale," and the exchange itself is treated as a transfer for the section 6050Y reporting rules. Section 1.101-1(b)(2)(iv) then carries the exclusion across in the same measure: if the entire proceeds attributable to the old interest would have been excludable, the entire proceeds attributable to the new interest are; if less, the excludable amount is capped at the previously excludable amount plus premiums and other amounts paid on the new interest, adjusted for money and property received in the exchange and gain recognised on it.

The accurate summary is that the exchange creates no new taint and does not cure an old one, and the reporting obligations still attach.

What does not travel: the portfolio

Now the point that surprises families most, and the one that should shape how a carrier is chosen at the outset.

Section 1035 moves a contract. It does not move the assets inside it. The underlying positions belong to the segregated account of the original insurer, and a change of carrier ordinarily means those positions are realised inside that account and the value transfers as cash.

We searched for authority on whether assets can move in kind between carriers in a section 1035 exchange, and there is none. Nothing in section 1035, in section 1031(b) to (d), in Treasury Regulation section 1.1035-1 or in any ruling we located speaks to the composition or form of what moves. What the authorities regulate is the form of the transaction, not the form of the assets: Revenue Ruling 2007-24 requires an actual exchange or direct transfer with the owner not taking receipt, and the boot rules concern what the policyholder receives, not what sits inside the contract.

So whether a receiving carrier will accept assets in kind, or requires liquidation to cash, is a matter of carrier underwriting, custody and administrative practice and of the separate account's investment guidelines. Federal tax law is silent, and the article that tells you the Code requires liquidation is inventing a rule.

The consequence for a policy holding illiquid private funds is severe and entirely practical. Positions with lock-ups cannot be redeemed on demand. Positions with quarterly liquidity and ninety day notice periods move on their own calendar. Capital commitments that have not been drawn cannot simply be assigned. An exit from a portfolio of private funds is a multi-quarter exercise even where the tax treatment is flawless, and there will be a period out of market that nobody budgeted for.

Which is the strongest argument in this entire subject for taking platform breadth and carrier stability seriously at the outset. The cost of choosing badly is not paid at signature. It is paid in year nine, in a liquidation schedule the family did not choose.

The state layer, which has nothing to do with tax

Separately from all of the above, a replacement is a regulated transaction in most states, governed by whatever version of the NAIC Life Insurance and Annuities Replacement Model Regulation, Model 613, the relevant state has adopted.

The model defines a replacement broadly, reaching transactions where an existing policy has been or is to be lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise terminated, reduced in value, amended to reduce benefits, reissued with a reduction in cash value, or used in a financed purchase.

Its duties are concrete. A producer must submit with the application a signed statement as to whether the applicant has existing policies, and if so must present and read a replacement notice not later than at the time of taking the application, listing all policies proposed to be replaced by insurer, insured and policy number. The replacing insurer must notify any other existing insurer that may be affected "within five (5) business days" of receiving an application indicating replacement. And it must give the owner notice of a right to return the contract "within thirty (30) days of the delivery of the contract" for an unconditional full refund, or, for a variable or market value adjusted contract, payment of the cash surrender value. The existing insurer has its own obligations, including writing to the owner about the right to receive policy values and in force illustrations.

Two things to hold onto. Model 613 is a model. It binds nobody until a state adopts it, and states adopt with variations, so the applicable rule is the state's. And compliance with it has no bearing whatever on whether the transaction qualifies under section 1035, just as section 1035 qualification says nothing about the state requirements. They are separate regimes that happen to govern the same transaction.

And if the family does not exchange

Worth stating the alternative, because it is the benchmark against which an exchange is judged.

A surrender is an amount not received as an annuity, received under a life insurance contract. Section 72(e)(5)(E)(ii) reaches "any amount received under a contract on its complete surrender, redemption, or maturity," and section 72(e)(5)(A)(ii) includes it in gross income "but only to the extent it exceeds the investment in the contract." That is cost recovery first: basis out, gain last. Section 72(e)(5)(A)(i) switches off the income first rule at (2)(B) and the loan treatment at (4)(A), which is why a loan from a contract that is not a modified endowment is not a distribution.

For a modified endowment, section 72(e)(10)(A) flips both switches back on, so distributions are income first and loans and pledges are taxable distributions. Section 72(v) then adds a ten per cent additional tax on the includible portion, subject to exceptions at or after age 59 and a half, for disability, and for substantially equal periodic payments.

The worst version of this deserves a warning of its own. Where a policy carrying a large loan lapses, the loan is discharged by offset against cash value, the taxpayer receives no cash at all, and the amount applied to extinguish the debt is includible to the extent it exceeds investment in the contract. The Seventh Circuit put it bluntly in Brown v. Commissioner, holding that the fact the income was used to pay a debt to the insurance company "is irrelevant, because it was a personal rather than a business debt and therefore was not deductible." The Tenth Circuit reached the same result in McGowen, though as an unpublished decision it is persuasive only, and the Tax Court has continued in the same direction. Phantom income exceeding anything the family ever saw is a real outcome and it is entirely avoidable by watching the contract.

A short checklist

Confirm the same insured under both contracts before anything else, because nothing else matters if that fails.

Establish whether the old contract is a modified endowment, and accept that the answer travels.

Resolve any outstanding loan before the exchange rather than inside it.

Execute an assignment and require an insurer to insurer transfer, so that nobody takes receipt.

Ask the receiving carrier, in writing, what it will accept in kind and what must be liquidated, and get a redemption calendar for every illiquid position before committing.

Model the receiving contract against a fresh 7-pay test, because a large rollover into a newly issued contract is exactly the fact pattern section 7702A(c)(3) is written for.

And check the state replacement requirements, which are somebody's job and are frequently nobody's.

Frequently asked questions

Can a PPLI policy be moved to a different carrier without tax?

Generally yes. Section 1035(a)(1) provides that no gain or loss is recognised on the exchange of a contract of life insurance for another contract of life insurance, and section 1035(d)(2) carries basis over through section 1031(d). The exchange must relate to the same insured, must be structured as an actual exchange or assignment with a direct insurer to insurer transfer, and any outstanding loan needs to be dealt with beforehand.

Does the same insured requirement really apply?

Yes. Treasury Regulation section 1.1035-1 states that section 1035 does not apply to exchanges "if the policies exchanged do not relate to the same insured." It cannot be drafted around. Value cannot be moved from a policy on one life into a policy on another life under section 1035.

What happens if the insurer sends me a cheque?

The exchange fails. Revenue Ruling 2007-24 held that where a taxpayer received a cheque and endorsed it to a second company to buy a new contract, the transaction did not qualify as a tax-free exchange and the amount received was taxable to the extent set out in section 72(e). The ruling distinguishes earlier guidance involving an actual assignment or a direct insurer to insurer transfer. The owner must not take receipt of the value.

Does an outstanding policy loan create a tax charge on the exchange?

The conclusion is that loan relief is boot, though it rests on statutory analysis rather than a published holding. Section 1035(d)(1) directs the reader to section 1031(b) and (c) for exchanges not solely in kind, and the third sentence of section 1031(d) provides that for purposes of section 1035(a), an assumption of the taxpayer's liability by another party "shall be considered as money received." Gain is then recognised up to the amount of the boot and basis is reduced. We found no ruling or case directly on the point.

Does modified endowment status carry over?

Yes, expressly. Section 7702A(a)(2) defines a modified endowment contract to include a contract "which is received in exchange for a contract described in paragraph (1) or this paragraph." The self-reference means the status survives an unlimited chain of exchanges. Separately, section 7702A(c)(3) treats a contract with a material change as newly entered into with an adjustment for the cash surrender value, which is why a large rollover into a new contract can fail a fresh 7-pay test on its own terms.

Is a 1035 exchange a transfer for value?

No, and Treasury said so in final regulations at T.D. 10052, published 9 July 2026. The reasoning is that a section 1035 exchange is not itself a transfer of the newly issued contract, because property must exist before it can be transferred. However, a pre-existing reportable policy sale taint follows the contract: Treasury Regulation section 1.101-1(c)(3) treats the new interest as previously transferred in a reportable policy sale, and section 1.101-1(b)(2)(iv) carries the exclusion across in the same limited measure. Section 6050Y reporting still applies.

Do the investments move with the policy?

Generally not. The positions belong to the segregated account of the original insurer, so a change of carrier ordinarily means they are realised inside that account and the value moves as cash. No tax authority addresses whether assets may transfer in kind; it is a matter of carrier practice, custody arrangements and the receiving account's investment guidelines. For a portfolio of illiquid private funds this makes an exit a multi-quarter exercise regardless of the tax treatment.

What state rules apply to replacing a policy?

Most states have adopted some version of the NAIC Life Insurance and Annuities Replacement Model Regulation, Model 613, with variations. It requires a signed statement about existing policies with the application, a replacement notice presented and read to the applicant, notice to any affected existing insurer within five business days, and notice of a right to return the contract within thirty days of delivery for a full refund or, for a variable contract, the cash surrender value. It is a model regulation, so the operative rule is whatever the relevant state has enacted, and compliance with it is entirely separate from qualification under section 1035.

Sources and authorities

Internal Revenue Code sections 1035(a), (b), (c) and (d); 1031(b), (c) and (d); 72(e)(1), (e)(4)(A), (e)(5)(A), (e)(5)(C), (e)(5)(E) and (e)(10), and 72(v); 101(a)(1), (a)(2) and (a)(3); 7702A(a), (b) and (c)(3). Treasury Regulations sections 1.1035-1, 1.1031(b)-1(c), and 1.101-1(b)(2)(iv) and (c)(3). T.D. 10052, 91 FR 42351, published 9 July 2026, on information reporting and the transfer for valuable consideration rules for section 1035 exchanges, following T.D. 9879 (2019). Revenue Ruling 2007-24, 2007-21 I.R.B. 1282; Revenue Ruling 2002-75, 2002-45 I.R.B. 812; Revenue Ruling 72-358. Revenue Procedure 2011-38, which by its terms addresses partial exchanges of annuity contracts and not of life insurance contracts. Chief Counsel Advice 200851060 on the same insured requirement, which under section 6110(k)(3) may not be cited as precedent. Brown v. Commissioner (7th Cir. 2012) and McGowen v. Commissioner (10th Cir. 2011, unpublished) on lapse with an outstanding loan. NAIC Life Insurance and Annuities Replacement Model Regulation, Model 613, which binds only as adopted by a given state.

Our editorial standards explain how articles like this one are sourced and reviewed.

This article is educational only and does not constitute legal, tax, investment, or insurance advice. Several points here rest on statutory analysis rather than published holdings, state replacement requirements differ, carrier practice on in-kind transfers varies, and the treatment of any particular exchange depends on its own facts. Engage qualified advisers in every relevant jurisdiction before acting.