Glossary
1035 exchange
A direct exchange of one insurance or annuity contract for another that, when the requirements are met, is not currently taxable.
A direct exchange of one insurance or annuity contract for another that, when the requirements are met, is not currently taxable.
Section 1035 of the Internal Revenue Code permits certain direct exchanges without current recognition of gain — for example, life insurance for life insurance, life insurance for an annuity, an annuity for an annuity, and, subject to conditions, life insurance or an annuity for a qualified long-term-care contract. An annuity cannot be exchanged tax-free into a life insurance policy. The transfer must go directly between carriers; taking receipt of the funds can make the transaction taxable. An exchange is not automatically an upgrade: a new contract often starts a new surrender period, benefits or riders attached to the original contract are usually lost, new underwriting may apply to life insurance, and outstanding loans can create taxable income. State replacement rules require a documented comparison, and the tax consequences should be reviewed with a tax professional before anything is signed.
Sources
Educational information only. This page is not individualized insurance, investment, tax, legal, or accounting advice, and it is not a recommendation to buy or replace any product.