1035 Exchange

The term 1035 exchange refers to a provision in the tax code that allows for the transfer of one annuity contract to a different annuity contract, without triggering a taxable event. Section 1035 refers to the specific provision of the Internal Revenue Code. Life insurance contracts may also be transferred under a 1035 exchange, and a life insurance contract may be transferred to an annuity contract. The exchange may involve the same insurer or two different insurers. The type of annuity is irrelevant under a 1035 exchange. In other words, a fixed annuity may be transferred to a variable annuity and vice versa. That said, the owner of each of the contracts must be the same. A 1035 exchange only applies to the account value of an annuity contract, not the guaranteed benefit values or the death benefit values of the contract. Partial exchanges are acceptable as long as the partial funds are transferred directly into the new contract. Contract owners may not directly receive funds from the original contract—this would be considered constructive receipt and would trigger a taxable event for the contract owner. Instead, funds must flow directly from the previous contract to the new contract and carrier.