Annuities

A guide to reviewing a potential 1035 exchange

A 1035 exchange can allow certain annuity and life insurance contracts to be exchanged without immediately triggering tax on a gain, but it doesn't automatically address fees, surrender charges, or features. Here's what to look at first.

What a 1035 exchange is

Section 1035 of the Internal Revenue Code allows certain exchanges of one annuity or life insurance contract for another, of like kind, without immediately triggering income tax on any gain in the original contract, when the exchange is handled correctly. This is a tax rule, not a recommendation, and whether an exchange makes sense for a given contract depends entirely on the specific circumstances involved.

What can and cannot be exchanged under Section 1035

An annuity contract for another annuity contract
A life insurance policy for another life insurance policy, or for an annuity or qualifying long-term care contract
A life insurance policy generally cannot be exchanged for a 1035 treatment if the direction runs the other way (annuity to life insurance)
Ownership on the new contract generally must match the old contract

Costs and features to compare before exchanging

A 1035 exchange addresses the tax treatment of a gain, it does not automatically address other costs or features tied to the contract you are leaving.

Does the current contract have a remaining surrender charge, and what would it cost to exchange now versus later?
What riders, guarantees, or death benefits would you give up by exchanging?
Does the new contract start a new surrender schedule?
What are the ongoing fees of the new contract compared with the old one?

Common reasons people consider an exchange

Access to different income riders or investment options
Lower ongoing fees in a newer contract
Consolidating multiple older contracts
Adding a long-term care or chronic illness feature not available on the original contract

Steps involved in a typical exchange

Request current contract values and any applicable surrender charge schedule from the existing carrier
Compare the new contract's features, costs, and guarantees against the current one
Complete exchange paperwork directly between carriers to help preserve 1035 tax treatment
Confirm with a tax professional how the exchange will be reported

Questions to bring to a review of your contract

What specifically am I gaining by exchanging, beyond a sales pitch for a new product?
What am I giving up, including any surrender charge or existing rider?
Has a side-by-side comparison of both contracts been put in writing?

Want this applied to your situation?

A no-obligation conversation can help you connect these ideas to your own accounts and timeline.

Discuss a potential 1035 exchange