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A 1035 exchange

How tax-free exchanges of non-qualified annuities work, what to compare before moving, and how the process typically unfolds.

What this guide covers: A Section 1035 exchange lets you move cash value from one qualifying insurance contract to another in a way that can defer taxation on built-up gain—if you follow IRS rules and use a direct transfer between companies. This is general education, not tax or legal advice; confirm any exchange with your CPA and the carriers involved.

In this guide we walk through how a 1035 exchange works, what to weigh before moving, and how the process typically unfolds. If you are comparing a new fixed (MYGA) rate to an older contract, our Savings Marketplace lists current offers from carriers that meet GetSure’s rating floor—then compliance, suitability, and paperwork still have to line up for an exchange to make sense.

What is a 1035 exchange?

A 1035 exchange (named after the Internal Revenue Code section) allows you to replace an existing qualifying annuity or life insurance policy with another qualifying contract without recognizing tax on the gain in the old contract at the time of the swap—provided the transaction is structured as a direct exchange and meets all applicable rules.

Keeping tax deferral intact is the main reason people use a 1035 instead of taking a check, depositing it, and buying something new. Constructive receipt of the money (you controlling the cash outside the insurance channel) generally breaks the exchange and can trigger ordinary income tax on the gain.

Typically the policy owner and annuitant (or insured) must stay the same for the exchange to qualify; changing parties usually starts a new tax story. Some products—many income annuities once irrevocably issued—cannot be rolled via 1035; the surrendering carrier’s contract language and IRS rules both matter.

A 1035 is worth evaluating when your current policy is no longer competitive, your goals have changed, a new policy clearly improves your economics after all costs, or an older contract is at or near maturity and you are choosing among renewal, cash, or a new carrier.

Factors to consider when assessing a 1035 exchange

Goals for the contract

Revisit why you bought the original policy: tax deferral, principal protection, income later, or legacy features. If your goals shifted, a different product family (MYGA vs. income annuity vs. FIA) may fit better—but only after comparing net economics, not headline rates alone.

Surrender charges and timing on the old contract

Most deferred annuities carry surrender schedules. Exchanging mid-term often means paying a surrender fee to the old carrier unless you are in a window where charges have ended or rolled off. Compare the fee to the expected benefit of the new rate, guarantee, or design—and to surrender terms on the new contract.

Surrender terms on the new contract

Expect a fresh surrender period on many replacements. Make sure you are comfortable tying up liquidity for that long and that the new policy’s rules (free withdrawals, riders, MVA language) match how you will actually use the money.

Crediting rate or payout vs. the old policy

Model after-fee outcomes: old contract value minus surrender vs. new contract at the quoted guarantee, including any bonus or rider charges that reduce net yield.

Carrier financial strength

Fixed and income guarantees depend on the issuer’s claims-paying ability. Compare ratings and outlook for the old and new insurers; a higher advertised rate from a materially weaker carrier may not be a good trade. GetSure’s marketplace focuses on carriers rated A− or better by AM Best for fixed deferred business we display.

Tax implications of a 1035 exchange

  • Deferred gain: Done correctly, you generally do not owe tax on the gain in the old contract at the time of the exchange; deferral continues in the new policy.
  • Direct transfer: Funds should move from company to company per exchange paperwork—not to your bank account first.
  • Cash surrender instead: Taking a distribution (other than permitted partials under very specific rules) usually taxes gain as ordinary income in the year received, with possible penalties if under 59½ on some annuity withdrawals.
  • Basis: Your cost basis can carry over in a qualifying exchange—even in odd cases where account value is below what you paid in—so future taxation still refers back to original premium and permitted adjustments rather than resetting to zero. Confirm with a tax advisor.
Example (illustrative): You funded a non-qualified annuity with $100,000 of premium. Years later the account value is $90,000 (market or benefit design dragged below cost for this illustration). A proper 1035 may still transfer that position to a new insurer while preserving your $100,000 basis for future gain/loss accounting—rather than cashing out and starting over. Real contracts vary; this is not individualized tax advice.

Life insurance and annuity 1035 exchanges (“like kind”)

IRC Section 1035 applies only to certain like-kind replacements. In practice (simplified):

  • Life insurance may be exchanged for life insurance, or in many cases for a non-qualified annuity.
  • Non-qualified annuity may be exchanged for another non-qualified annuity.
  • A non-qualified annuity generally cannot be 1035’d into life insurance.

Qualified retirement money follows different rollover rules; do not assume IRA/401(k) mechanics match non-qualified 1035 treatment.

1035 exchange fees

There is usually no separate IRS “1035 filing fee.” Costs show up as:

  • Surrender charges on the old contract (often still apply in an exchange).
  • Waivers sometimes available for same-company product swaps—ask the ceding insurer.
  • New policy charges (riders, spreads on FIAs, etc.).

Some MYGAs beyond the initial guarantee period—or in a renewal window—may have little or no surrender cost; older policies sometimes have expired surrender schedules. Read the statement and the schedule, don’t guess.

Typical steps in the 1035 process

  1. Decide whether an exchange beats renewal, holding, or taking taxable cash—using numbers, not instinct alone.
  2. Select the receiving product and carrier; obtain a current illustration and application.
  3. Contact the old insurer for their 1035 / transfer kit and timing requirements.
  4. Complete new-application and 1035 transfer forms; sign any required replacement or disclosure notices for your state.
  5. Follow through until the receiving carrier confirms premium applied and the old contract is closed out properly.

Information from your existing policy that helps

  • Legal carrier name and product name
  • Policy or contract number and recent statements
  • Surrender charge schedule and current cash / account value
  • Riders, income or death benefit options, and maturity / renewal terms

Different kinds of annuity 1035 exchanges

From a fixed index annuity (FIA)

You may be able to 1035 to another FIA, a traditional fixed annuity, a variable annuity, or an income annuity, depending on carrier appetite and suitability. Compare any income rider on the FIA to quotes for a single-premium immediate or deferred income product if income is the goal.

From a variable annuity (VA)

Similar destination flexibility may exist, again subject to underwriting and state rules. Income riders on VAs should be compared apples-to-apples to new income annuity payouts.

Non-maturing traditional fixed (MYGA-style) contract

If you are still inside a surrender window, expect a surrender fee. Model end-of-term value on the old policy vs. net value after fee at the new guaranteed rate. If rates haven’t improved much since purchase, waiting for maturity can be rational.

Maturing traditional fixed contract

Near maturity you may choose 1035, cash out, or renew with the same carrier. Know the maturity date, how long you have to give instructions, and whether the carrier parks you on a low month-to-month rate until automatic renewal—start paperwork early enough that you don’t forfeit yield while mail moves.

Partial exchanges, parties, and other rules

Partial 1035

The IRS allows partial 1035 treatment in some fact patterns, but the surrendering company must cooperate, and basis allocation between contracts requires care. Involve a tax professional before partials.

Owner and annuitant

Generally you cannot change owner or annuitant just to qualify an exchange; ownership continuity is part of the compliance story.

Like-kind categories (overview)

Examples of exchanges that often qualify for Section 1035 treatment (confirm current law) include:

  • Life insurance for life insurance
  • Life insurance for non-qualified annuity
  • Non-qualified annuity for non-qualified annuity
  • Certain endowment swaps within statutory limits

One contract into many (or many into one)

Multiple old contracts can often roll into one new contract. Going from one old contract to several new ones is usually not allowed under 1035—structure matters.

How GetSure fits in

1035 exchanges mean coordinating two insurers, each with its own forms and timelines. GetSure can help you compare published fixed rates and carrier strength, walk through our application flow when you choose a new contract, and point you to resources like how funding works after signatures. We do not provide tax advice; your tax advisor and both carriers’ servicing teams remain essential to a clean transfer.

Next steps

Disclosure: Guarantees are subject to the claims-paying ability of the issuing insurer. Annuities are not FDIC- or NCUA-insured. This page is educational only and not a recommendation to replace any policy. State replacement regulations and suitability rules apply to many exchanges.