Definitions for "Section 1035 Exchange"
The tax-free exchange of one nonqualified annuity contract or life insurance policy for another with a different company. For example the transfer of a life to life; life to annuity; annuity to annuity policy. Partial transfers are also permitted.
Section 1035 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of (1) a life insurance policy for another life insurance policy, an endowment contract, or an annuity contract; (2) an endowment contract for another endowment contract that provides for regular payments that begin no later than the date payments would have begun under the contract exchanged; or (3) an annuity contract for an annuity contract, provided the owner and the annuitant remain the same.
1035 refers to a provision in the tax code which allows for the direct transfer of accumulated funds in a life insurance policy, endowment policy, or annuity policy to another life insurance policy, endowment policy or annuity contract without creating a taxable event.