New 2026 Regulations on Life Insurance Exchanges: What You Need to Know
On July 9, 2026, the U.S. Department of the Treasury and the Internal Revenue Service unveiled new regulations (T.D. 10052, 91 Fed. Reg. 42345) addressing the exchange of life insurance contracts without recognition of gain or loss. These guidelines tackle issues arising from the Tax Cuts and Jobs Act of 2018 (TCJA), particularly concerning sections 101 and 6050Y of the Internal Revenue Code. The regulations also streamline reporting requirements for life insurance contracts acquired during certain tax-deferred mergers and acquisitions.
Background
The regulatory framework for life insurance exchanges has seen significant shifts. Historically, Section 1035 of the Code permitted tax deferral on gains and losses when life insurance contracts were exchanged for those covering the same insured. Section 101(a)(1) generally maintains that death benefits are not taxable unless specific conditions, such as a contract transfer for value, are met.
Prior to the TCJA, a Section 1035 Exchange wasn't viewed as a taxable transfer if it qualified under the Carryover Basis Exception. This designation either exempted the contract from being seen as a transfer or qualified it under an exception, circumventing tax exclusion limitations. However, post-TCJA changes and 2019 regulations reclassified these exchanges as reportable policy sales, potentially incurring taxes if no significant relationship exists between the buyer and insured.
Unintended Consequences and Clarifications
Responding to industry feedback, the Treasury proposed new rules in 2023 to address these issues. They clarified that Section 1035 Exchanges were not meant to alter the Transfer-for-Value Limitation on new contracts if the original contract wasn't involved in a reportable policy sale. These regulations affirm that a Section 1035 Exchange only maintains the restrictions of the original contract, without imposing new ones on the new contract.
Final 2026 Regulations
The finalized 2026 rules assert that a Section 1035 Exchange does not generally trigger a Transfer-for-Value Limitation unless it already applied to the original contract. This clarification resolves prior ambiguities and aligns with the 2023 proposals. The regulations also stipulate that when cash or property is part of a Section 1035 Exchange, a reduction in the Death Benefit Exclusion carries over to the new contract, with continued reporting using IRS Form 1099-R.
Mergers and Acquisitions
For mergers and acquisitions, the rules detail that transactions fitting the tax-deferred reorganization criteria per Section 368 of the Code are exempt from being seen as reportable policy sales. This is applicable if the target company is not chiefly involved in life insurance investments and holds limited life insurance assets. The IRS has invited further comments on handling taxable transactions and those involving partnerships.
Implementation
These regulations apply to exchanges and acquisitions of life insurance interests starting July 9, 2026. Taxpayers are allowed the option to retroactively apply these regulations to transactions from as early as January 1, 2018.