The replacement of an annuity or life insurance policy, that is, the exchange of existing policies for new ones purchased from different companies without tax consequences, is called a Section 1035 Exchange. To qualify for the tax advantages of such an exchange, the procedure followed in the exchange must meet the requirements of Section 1035 of the Internal Revenue Code if the transaction is to be tax-free. A 1035 Exchange allows the contract owner to exchange outdated, sometimes costly or inefficient contracts for more current and efficient contracts, while preserving the original policy's tax basis and deferring recognition of gain for federal income tax purposes.
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