A reader asked whether you can do a 1035 exchange later in life, when the cost of insurance goes up. The cost of insurance is the yearly charge for the death benefit, and a 1035 exchange moves a policy's cash value into a new policy or an annuity without a tax bill. I covered the basics in the 1035 exchange post. The short answer is yes, it's possible. I'd look at that charge differently than most people do, though.
Don't judge the cost of insurance by itself. Look at it next to the size of the policy and how it's growing. Say the charge hits $30,000 in a year when you're around 90. That sounds expensive. But it's that high because the policy holds $5 million or $10 million, and the tax code requires the carrier to keep a certain amount of insurance at risk above the cash value so the policy still counts as life insurance. I explained that gap in why your death benefit grows on its own once cash value gets big. On a $10 million policy, a $30,000 expense is 0.3%. And if the policy grows by $300,000 to $500,000 in that same year, the expense is a small slice of the growth.
You could take the cash out and invest it somewhere else. Some ETFs and mutual funds charge about 0.1%, which is cheaper by percentage. They also come with no downside protection and no death benefit that passes on tax free if you leave the money alone. And at 90, you may not want to manage the money yourself. A financial professional will probably charge more than 0.3%.
The catch with an exchange is that you have to qualify for the new product. You can't exchange just because you own the old one. Someone who qualifies is usually not very old, and at that age the cost of insurance isn't very high yet. So the cost of insurance alone rarely drives an exchange.
What does more often is the product itself. A carrier can cut the cap, which is the most you can be credited in a year, or change bonus options and other terms the contract allows. If those changes limit growth to a level you're not happy with, an exchange belongs on the table. A viewer put this question to me in a video on 1035 exchanges when the cost of insurance gets too high, and what an IUL carrier can change after you buy lists what to watch for.
The tax treatment depends on your return, and I'm not a tax advisor, so confirm it with your preparer first. Keep the old policy in force until the new one is approved, because an exchange only goes through if the new carrier accepts you.