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I have a life insurance question. I have several policies…

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I have a life insurance...
I have a life insurance question. I have several policies with Northwestern Mutual Life totaling about $300,000.00 in whole life insurance and about $200,000.00 cash value. They are old policies. I am 58 years old. I borrowed against the policies. We are close to the point where I have borrowed about 80-90% of the cash value to pay for my children's college. I have to start paying the loans back. Here's my question - does Northwestern Mutual Life have a method whereby I can consolidate my policies and negotiate a certain amount of lower, permanent life insurance? This would be instead of paying the loan back or closing out the policy which would trigger a tax event. I would be grateful for any advice you could offer.
Submitted: 10 months ago.Category: Tax
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Answered in 1 hour by:
10/4/2017
Tax Professional: Lev, Tax Advisor replied 10 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 33,339
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If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In most cases, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

.

However - there is an option often referred as section 1035 exchange

https://www.law.cornell.edu/uscode/text/26/1035

(a) General rules

No gain or loss shall be recognized on the exchange of—

(1) 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; or ....

.

Thus it is possible to exchange one insurance contract for another and NOT recognize any taxable gain.

Under § 1.1035-1, the contracts exchanged must relate to the same insured, and the obligee or obligees under the contract received in the exchange must be the same as those under the original contract.

It is possible to have a partial exchange - the Revenue Procedure 2011-38 clarifies rules governing partial exchanges.

https://www.irs.gov/pub/irs-drop/rp-11-38.pdf

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