The 1035 exchange: switching policies without the tax bill
It moves the cash value. It doesn't make a bad replacement a good one.
If you own a permanent life policy with cash value and want to move to a different policy, cashing it out can create taxable income on the gain. Section 1035 of the Internal Revenue Code lets you exchange certain contracts without recognizing that gain, as long as the exchange follows the rules.
This is general information, not tax advice. Talk to a tax professional before exchanging a policy.
Which exchanges qualify
Notice what's missing: an annuity can't be exchanged tax-free into a life insurance policy.
- Life insurance for another life insurance policy, an endowment, an annuity or a qualified long-term care contract.
- An endowment for another endowment (with conditions), an annuity or a qualified long-term care contract.
- An annuity for another annuity or a qualified long-term care contract.
How it's usually done
The money moves directly from the old insurer to the new one. You don't take the cash yourself in between. The new insurer normally handles the paperwork. Outstanding policy loans and other cash you receive in the exchange can be taxable.
What a 1035 exchange doesn't fix
Avoiding tax is only one part of the decision. A new policy can bring new surrender charges, a new contestability period, and pricing based on your current age and health. Most states regulate life insurance replacements and require disclosures, and you'll usually get a period to change your mind. Compare the old and new policies side by side before you sign.
Common questions
It's a tax-free exchange, under Section 1035 of the tax code, of one insurance or annuity contract for another of an allowed type, such as life insurance for another life policy or an annuity.
No. The code allows exchanges from life insurance into an annuity, but not from an annuity into life insurance.
Not necessarily. It avoids tax on the gain, but a new policy may bring new surrender charges and a new contestability period. Compare carefully.
Want this priced for your situation?
This page is general information, not advice about your specific circumstances. A licensed insurance professional can tell you what’s actually available to you.
Sources
- 26 U.S. Code § 1035, Certain exchanges of insurance policies, Cornell Legal Information Institute. Checked 23 September 2026.
- Should you exchange your life insurance policy?, FINRA. Checked 23 September 2026.
General information only, not insurance advice. Coverage, availability, and terms vary by insurer and by state, and are subject to underwriting. Quote My Policy LLC connects you with licensed insurance professionals. Nothing here binds coverage.