1035 Exchange
IRC Section 1035 allows tax-free exchange of life insurance to life insurance/annuity/LTC, or annuity to annuity/LTC, but NOT annuity to life insurance.
Exam Tip
1035 = tax-free exchange. Life→Annuity OK, Annuity→Life NO. Same owner/insured. Direct transfer. Basis carries over.
What is a 1035 Exchange?
Tax-free exchange of insurance products.
Permitted Exchanges
- Life → Life, Annuity, or LTC: YES
- Annuity → Annuity or LTC: YES
- Annuity → Life: NO!
Requirements
- Same owner
- Same insured
- Direct transfer (no constructive receipt)
Tax Treatment
- Basis carries over
- Gain deferred until new policy surrendered
- New contestability period starts
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