Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Licensed Auto Insurance Agent Daniel Walker

UPDATED: Apr 3, 2022

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The 1035 exchange is a tax code provision that makes it possible to transfer certain assets without requiring you to pay taxes on that money. The 1035 exchange works with annuities, endowment policies, and life insurance policies.

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Tax laws are complicated, but there are some basic rules that are simple enough to understand. With many tax deferred accounts, you don’t pay taxes on the money you invest, but you have to pay taxes on that money when you withdraw it.

However, with the 1034 exchange, you can withdraw funds from certain types of tax deferred accounts and avoid paying the taxes by simply using the money to purchase the same type of account elsewhere.

If you are unhappy with your annuity, for example, and would like to buy an annuity with another insurance company, then you can close your account and transfer your money to a different annuity fund without paying taxes on that money. That is because, in essence, you are merely transferring your tax deferred dollars to a different holder. You did not withdraw the funds and keep the money.

Accounts that can be Transferred Under the 1035 Exchange

Not every tax deferred account qualifies under the 1035 exchange. As a matter of fact, the 1035 exchange really only applies to insurance products. While it is true you can rollover a 401k into a different 401k without paying taxes on the initial withdraw, that penalty free option is provided for with a different tax code.

The 1035 Exchange works strictly with annuities, endowment policies, and life insurance policies. Annuities, endowments, and life insurance are all part of your financial portfolio to provide benefits to you either during retirement or to your heirs after your death.

Annuities pay out a monthly income stream during your retirement but do not pay out any death benefit. Endowment policies cash out part of all of a life insurance policy prior to a death benefit as long as a certain length of term has been reached. Life insurance policies pay out benefits to your named beneficiaries upon your death.

If you have any or all of the three named insurance products, then you may be able to benefit from the 1035 Exchange. There are restrictions as to when and how the 1035 exchange can be applied, and there may be some caveats as well.

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Reasons to Use the 1035 Exchange to Transfer Your Annuities or Other Insurance Products

Even if you are perfectly happy with your annuity or other insurance products, it may be a good idea to switch accounts to a different provider. Tax savings and rate increases are two of the main reasons you may consider making the change.

Depending on the type of annuity you hold, annuities are made up of stocks that can rise or fall, causing your investment to fluctuate with the market. Although typically there is no way to sell stock and avoid paying taxes on your profits, if you sell your annuity by transferring to a different portfolio, you will find tax shelter via the 1035 exchange tax code.

You also have the opportunity of trading up your annuity, endowment account, or life insurance policy by selecting a different product for a better rate of return without the risk of tax penalties. Provided you trade your product for the same type of product, your money will be considered an asset transfer protected by the 1035 exchange.

The Pitfalls of the 1035 Exchange

Not every transfer qualifies for tax shelter under the 1035 Exchange. For example, you must transfer the same insurance product type for the same insurance product type. This means you can swap an annuity for an annuity, but you cannot trade an annuity for a life insurance policy.

The maturity date from one product to the next must also match or it will not be considered a transfer under the 1035 exchange. If your insurance product transfer does not qualify for the 1035 exchange, you will have to pay your tax deferred income taxes.

Another way you may get penalized is not through the pitfalls of the 1035 exchange, but the pitfalls of your insurance product contract. Read your contract carefully to find out if there are any penalties for early surrender. You may have to pay some heavy fees for withdrawing your money early, but it may still be worth the swap depending on why you are making the trade.

In summary, the 1035 exchange allows you to transfer your annuity, endowment, or life insurance product for another annuity, endowment, or life insurance product without paying taxes on the money you withdraw to make the change. The accounts have to be the same type of product and may have to meet other criteria to qualify as well.

Since the 1035 exchange removes the tax penalty for upgrading your annuity, endowment, or insurance policy, it is a good time to shop around and see what other products may be better suited for your retirement plan. Enter your zip code now and start comparing insurance quotes and annuity rates today.