Life Insurance
1035 Exchange
A 1035 exchange, named after IRC Section 1035, allows the tax-deferred rollover of cash value from an existing life insurance policy to a new life insurance policy or annuity—or from an annuity to another annuity—without triggering a taxable event on the transferred gain.
Last reviewed: May 2026 · Editorial methodology
Definition
Under Internal Revenue Code Section 1035, a policyholder can surrender an existing life insurance or annuity contract and directly transfer the proceeds to a new contract without recognizing the accumulated gain as taxable income in the year of transfer. Eligible exchanges include: life insurance to life insurance, life insurance to an annuity or long-term care policy, and annuity to annuity. The original cost basis of the old policy carries over to the new contract, preserving the tax deferral. For example, if a policyholder has a whole life policy with $120,000 in cash value and a $40,000 cost basis, a direct 1035 exchange to a new universal life policy defers the $80,000 gain; a direct cash surrender followed by a new purchase would trigger $80,000 of ordinary income. The exchange must be a direct transfer—the policyholder cannot receive a check—and must be handled between carriers using IRS-approved documentation. A 1035 exchange does not restart the contestability period on the new policy in most circumstances. Partial 1035 exchanges are permitted but subject to complex basis allocation rules and should be handled by a qualified tax advisor.
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Cover Forge USA Editorial Team
Editorial Lead
This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.
Reviewed 2026-06-14
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