4.3.2 1035 Contract Exchanges
As you know, gains on financial investments are typically taxable income. Rather than surrendering a policy and having to pay income tax right away, Section 1035 of the Tax Code allows the owners the flexibility to exchange their policy for another. In this way, the gain is not taxable. Exchanges can be accomplished through several methods.
- A life insurance policy can be exchanged for another life insurance policy, endowment policy, or annuity contract.
- An endowment policy can be exchanged for an annuity contract.
- An annuity contract can be exchanged for another annuity contract.
