1035 Exchange: How to Swap a Life Insurance Policy or Annuity Without Taxes

Which exchanges qualify

Source: 26 U.S.C. § 1035. The policies generally need the same insured and owner.

How a 1035 exchange works

1. Apply for the new policy or annuity and get approved before giving up the old one.
2. Sign a 1035 exchange or absolute assignment form so the new insurer requests the money from the old one.
3. Let the insurers transfer the funds directly. If you take a check yourself, it’s generally a taxable surrender, not an exchange.
4. Keep records of your cost basis, which carries over to the new contract.

Worked example

Illustrative only: your old universal life policy has $80,000 of cash value and you’ve paid $50,000 in premiums. If you surrendered it, about $30,000 would generally be taxable as ordinary income. Moving the $80,000 directly to a new policy through a 1035 exchange defers that $30,000, and your $50,000 basis carries over to the new contract (26 U.S.C. § 1035).

Loans and partial exchanges

• Outstanding loans: if a loan on the old policy is paid off or not carried over in the exchange, the amount can be treated as taxable “boot.” Ask whether the new insurer will carry the loan.
• Partial exchanges: part of an annuity can be exchanged into another annuity, with special timing rules for withdrawals afterward.
• Long-term care: life insurance and annuities can also be exchanged into qualified long-term care contracts.

Paperwork and timing

1. Apply for the new policy and get it approved before giving up the old one.
2. Sign the new insurer’s 1035 exchange and assignment forms; don’t cash out the old policy yourself.
3. Complete any replacement notice your state requires; many states require one when a policy is replaced.
4. Watch for the transfer to finish, which can take a few weeks, and keep both insurers’ confirmations.

When an exchange may not make sense

• Surrender charges: the old policy may still charge a fee to move money out, and the new one may start a fresh surrender schedule.
• New contestability and suicide periods: these usually restart with the new policy; see contestability period.
• Lost guarantees: older policies sometimes have guaranteed interest rates or terms no longer offered.
• Health changes: if your health has declined, a new policy may cost more than keeping the old one.

Ask for side-by-side illustrations of the old and new policies before you decide.

2026 rule update

Final regulations issued in July 2026 fixed a 2019 rule that could have treated a policy issued in a 1035 exchange as a “transfer for value,” which risked making death benefits taxable. Under the final rules, a new policy generally keeps the tax treatment of the old one, and reporting between insurers was simplified (Current Federal Tax Developments: final Section 1035 regulations (July 2026)).

Before you replace a policy

• Compare surrender charges on the old policy and new ones on the replacement.
• A new life policy starts a new two-year contestability period and suicide exclusion.
• Your health today affects the new policy’s price.
• Outstanding loans on the old policy can create taxable “boot” in an exchange.
• Many states require a replacement disclosure form; read it carefully.

1035 exchange FAQs

Related guides

• Cash value life insurance
• Annuities
• Is life insurance taxable?
• Whole life insurance
• Universal life insurance
• Contestability period
• Life settlements
• Hybrid life and long-term care insurance

Your next step

Tell us about the policy you own, and a licensed agent will help you compare replacement options.