What Does Section 1035 Exchange Mean?
Section 1035 exchange refers to the exchange of a current annuity contract, life insurance contract, or endowment contract for a new one without subjecting it to any tax consequence for as long as it involves the same policyholder or annuitant and the same contract or policy.
Section 1035 exchange is also known as tax-free 1035 exchange.
Insuranceopedia Explains Section 1035 Exchange
Section 1035 exchange commonly occurs with annuitants or policyholders who want to exchange their policy or contract for a new one that has improved benefits, lower fees, and different investment choices. The exchange is free of any taxation if it meets the strict guidelines of the Internal Revenue Service. The owner, annuitant, or policyholder of the old contract must be the same on the new contract for it to be eligible for a tax-free treatment. Insurance companies must also directly exchange to keep the policy free of tax.