Life Insurance vs Annuity

Exchanging a life insurance policy for another life insurance policy, or a life policy for an annuity — Section 1035 permits tax-free exchanges of: life insurance for life insurance, life insurance for an annuity, and annuity for annuity — provided the insured/annuitant is the same and the exchange is direct. An annuity may NOT be exchanged tax-free for a life insurance policy, and a surrender-then-repurchase is a taxable event. The exchange must be property-for-property, same owner.

National insurance concept

Excludes the $200,000 principal from income but pays tax on the interest portion of each installment. — Under IRC Section 101(a), life insurance death proceeds are generally excluded from the beneficiary's gross income when paid as a lump sum. When the proceeds are instead paid under a settlement option in installments, the principal is recovered tax-free in proportion, but the interest element of each payment is taxable as ordinary income. The beneficiary reports only the earnings on the deferred principal, never the $200,000 death benefit itself. This mirrors the annuity exclusion-ratio principle under IRC Section 72.

National insurance concept