Skip to main content
Welcome to the new FINRA.org. Learn more about our updates.
Create your own user feedback survey

1035 Exchanges

The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on the original contract. This can be a substantial benefit. Because this is governed by Section 1035 of the Internal Revenue Code, these are called "1035 Exchanges."

But this benefit comes with some important strings.

  • The tax code says that the old insurance policy must be exchanged for a new policy—you cannot receive a check and apply the proceeds to the purchase of a new insurance policy.
  • The tax code also says that you can make a tax-free exchange from: 1) a life insurance policy to another life insurance policy or 2) a life insurance policy to an annuity. You cannot, however, exchange an annuity contract for a life insurance policy.

A transaction in which a new insurance or annuity contract is to be purchased using all or a portion of the proceeds of an existing life insurance or annuity contract is referred to as a "replacement." A 1035 Exchange is a type of replacement transaction. Although the term "1035 Exchange" is often used to describe any form of replacement activity, technically not all replacements are Section 1035 Exchanges and as a consequence are not tax-free.

There are a number of factors you should consider when deciding whether to exchange your insurance policy, including potential loss of death benefits. For more information and a list of questions to ask, see FINRA's Investor Alert entitled Should You Exchange Your Life Insurance Policy?