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.

Annuity Taxes

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Annuity Digest Buying Guide: Annuity Taxes

The following list provides links to some of the key terms discussed in this chapter on

Stagnant Annuity Market - Conning Study

Conning Research & Consulting recently published a report on the individual annuity market.

The U.S. indivual annuity market is increasingly concentrated and has suffered from less than robust growth rates over the past several years.


Long Term Care 1035 Exchanges Developing Slowly

A provision of the Pension and Protection Act of 2006 went into effect this past January first which allows for a tax-free exchange (a Section 1035 exchange ) of annuities for long term care coverage. However, Investment News reports that there has been very little of this type of activity since the first of the year.

Tax Free Long Term Care Payments from an Annuity

The Pension Protection Act of 2006 has a provision that will allow for tax free long-term care payments from an annuity product. The law will also allow for Section 1035 Exchanges of older annuity products into the new hybrids. The combined or "hybrid" product has been in development within insurance companies over the past several years. The anticipated launch date for these new products is January 1 2010--the date that the provision in the Pension Protection Act is intended to go into effect...
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