Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
For an exchange of annuity contracts to be tax-free under IRC Section 1035, the transaction must be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Section 1035 requires a direct property-for-property exchange between contracts, typically of the same policyowner or annuitant. Surrendering one contract and then using the proceeds to buy another is a taxable event because the old contract is treated as being distributed to the owner. A cash withdrawal in connection with the exchange is taxable. The exchange privilege runs from life insurance to life insurance, life to annuity, and annuity to annuity — never annuity to life insurance.
Why the other options are wrong
- B) A surrender-then-repurchase does not qualify as a direct exchange; the distribution is taxed before the new purchase.
- C) Receiving cash from the old contract in the exchange triggers tax on the amount received over basis.
- D) The 1035 privilege is a one-way escalator toward annuities; exchanging an annuity for a life insurance policy is a taxable event.
Memory hook
1035 = straight hand-off between contracts, same owner, no cash detour. Annuity-to-life is off the escalator.