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Does an IRC Sec. 1035(a) exchange of a life insurance policy with a large cash value create a modified endowment contract?

April 26, 2017cash create exchange IRC large Life Insurance policy sec value

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Does an IRC Sec. 1035(a) exchange of a life insurance policy with a large cash value create a modified endowment contract?

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No. Pursuant to IRC Sec. 7702A, a 1035(a) exchange of a life insurance policy is a “material change.” Material change, however, does not mean that the new policy is automatically a modified endowment contract. It simply means that any further premiums must satisfy the “7-pay test.” Although PL’s illustration systems will test for this, a good rule of thumb is that after the 1035(a) exchange, if the new policy can accept at least 7 level premiums, then it will not be a modified endowment contract.