IRS Updates Rules for Life Insurance Contract Swaps
Published Date: 7/9/2026
Rule
Summary
Starting July 9, 2026, new IRS rules change how life insurance exchanges and sales report important info, especially when money or benefits change hands. If you’re involved in swapping or selling life insurance contracts, these rules affect how you report and handle payments, helping keep taxes clear and fair. Get ready to follow fresh reporting steps that could impact your paperwork and timing!
Analyzed Economic Effects
4 provisions identified: 3 benefits, 0 costs, 1 mixed.
1035 Exchange Tax Treatment Restored
The regulations say issuing a new life insurance contract in a Section 1035 exchange is not itself a 'transfer' for the transfer-for-value rule. If the old contract's death proceeds were fully excludable under section 101(a), the new contract's proceeds are fully excludable; if not, the excludable amount for the new contract is limited to the excludable portion of the old interest plus premiums and other amounts paid for the new interest, reduced (not below zero) by money or other property received (boot) and increased by any recognized gain.
Rule Effective July 9, 2026
These IRS regulations take effect on July 9, 2026. They apply to the new reporting and transfer-for-valuable-consideration rules described in Sec. 1.101-6 and Sec. 1.6050Y-1(b) for life insurance contract transactions.
Reporting Changes for 1035 Exchanges
When a policyholder exchanges an RPS (reportable policy sale) contract in a Section 1035 exchange, the old issuer must notify the new issuer about the old contract's RPS status and the policyholder's investment in the old contract so reportable death benefits can be tracked. The final rules do not require the old or new issuer to file additional information returns for these exchanges, do not require issuers to furnish new statements to policyholders under §1.6050Y for 1035 exchanges, and anticipate adding a new distribution code in Box 7 of Form 1099-R to identify an RPS exchange once the IRS issues a revised Form 1099-R and instructions.
5% De Minimis Rule for C‑Corp Deals
The final regulations adopt a de minimis exception for certain corporate reorganizations: if, immediately before and after a section 368 reorganization among C corporations, life insurance contracts make up no more than 5 percent of the gross value of the target's assets (as determined under the rule), the direct acquisition of those interests is not a 'reportable policy sale.' The 5 percent threshold is adopted without change.
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