A 1035 exchange lets you transfer the value of an existing annuity (or life insurance policy) into a new annuity contract — completely tax-free. It is one of the most powerful but underused tools in annuity planning, especially for people stuck in older, underperforming contracts.
What Is a 1035 Exchange?
Named after Section 1035 of the IRS tax code, this provision allows a tax-free like-for-like transfer: life insurance to life insurance, life insurance to annuity, or annuity to annuity. Your accumulated gains are not taxed at the time of transfer — they carry over into the new contract with your original cost basis preserved.
When a 1035 Exchange Makes Sense
- Your current annuity has low interest rates or cap rates compared to today’s market
- Your carrier’s financial strength rating has declined and you want to move to a stronger insurer
- You want to add a guaranteed lifetime income rider that your current contract doesn’t offer
- Your surrender period has ended and a more competitive product is available
- You have a low-performing whole life or universal life policy with accumulated cash value you’d rather convert to an annuity
How the Process Works
A 1035 exchange must be completed as a direct carrier-to-carrier transfer — you cannot take possession of the funds yourself, or it becomes a taxable event. We handle the paperwork between your old and new carriers. The process typically takes 2–4 weeks and requires your existing policy or contract number and current surrender value.
What to Watch Out For
- Surrender charges on the old contract: If you’re still within your current contract’s surrender period, the old carrier may impose surrender charges even in a 1035 exchange
- New surrender period: The new contract starts its own surrender period from the exchange date
- Cost basis carryover: Your original after-tax cost basis transfers to the new contract, maintaining its tax-free status on future withdrawals of principal
Call us at 1-888-972-0024 to review your current contract and find out if a 1035 exchange can get you a better rate or better benefits.