What does a 1035 Exchange allow a policyholder to do?

A 1035 Exchange allows a policyholder to exchange one life insurance or annuity contract for another without immediately recognizing any gain or loss for tax purposes. This provision is beneficial for individuals who wish to switch their insurance policies or annuities to better suit their financial goals or needs without incurring a tax liability at the time of the exchange.

The primary advantage of a 1035 Exchange is that it permits the policyholder to defer taxes on any gains from the original contract until they eventually cash out or surrender the new policy. This can result in increased flexibility, allowing individuals to choose policies that may have better terms, lower fees, or enhanced benefits while maintaining favorable tax treatment.

The other options do not accurately reflect the specific benefits of a 1035 Exchange. Recognizing gains on an exchange would negate the tax-deferred benefit, converting term insurance to whole life does not pertain specifically to the exchange provision, and changing the beneficiary does not involve a 1035 Exchange as it relates to ownership of the policy rather than a contractual exchange.