1035 Exchange Rules for Annuities: A Producer Checklist

Updated October 2026

Short answer: A 1035 exchange moves the value of an annuity, or of a life insurance policy, into a new annuity without current tax on the gain. It qualifies when the exchange type is one Section 1035 allows, the money moves directly from insurer to insurer and the owner stays the same. It's still a replacement, so check surrender charges and lost benefits, document why the new contract is in your client's best interest and complete your state's replacement forms first.

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What is a 1035 exchange?

Definition: A 1035 exchange is a swap of one life insurance, endowment or annuity contract for another under Section 1035 of the Internal Revenue Code. No gain or loss is recognized on a qualifying exchange, and the new contract keeps the old contract's cost basis, so the gain is deferred, not erased. For annuity producers, the most common versions are annuity-to-annuity exchanges and moving a life insurance policy's cash value into an annuity.

Section 1035 covers non-qualified contracts. Annuities held in an IRA or another retirement plan move under the retirement-plan rules instead, covered below.

Which 1035 exchanges qualify?

Exchange	Tax-free under Section 1035?	Notes
Annuity to annuity	Yes	Section 1035(a)(3). The owner must stay the same.
Life insurance to annuity	Yes	Section 1035(a)(1). The death benefit ends with the old policy.
Endowment to annuity	Yes	Section 1035(a)(2).
Annuity to a qualified long-term care insurance contract	Yes	Added by the Pension Protection Act of 2006 for exchanges after December 31, 2009.
Annuity to life insurance	No	Not on the Section 1035 list.
IRA or retirement-plan annuity to another IRA or plan	Not a 1035 exchange	Use a trustee-to-trustee transfer or a direct rollover.

Under Section 1035(b)(2), an annuity that includes a qualified long-term care rider is still treated as an annuity contract, which matters for care-linked products. See our page on care and LTC annuities.

1035 exchange requirements

1. An allowed exchange type. Annuity to annuity, life insurance or endowment to annuity, or annuity to a qualified long-term care contract. An annuity can't be exchanged for life insurance.
2. The same owner on both contracts. For annuity-for-annuity exchanges, IRS regulations require the same person or persons to be the obligee under both contracts, so keep ownership the same. Changing the owner is a separate transaction with its own tax rules.
3. A direct transfer between insurers. In Rev. Rul. 2007-24, an owner endorsed a check from one insurer over to a second insurer to buy a new annuity. The IRS ruled it was not a 1035 exchange, and the amount was taxable under Section 72(e).
4. Exchange paperwork, not surrender paperwork. Use the receiving carrier's 1035 exchange or transfer form. A client who signs a surrender or distribution form by mistake can turn a planned exchange into a taxable distribution.
5. A 180-day hold on partial exchanges. Under Rev. Proc. 2011-38, a direct transfer of part of an annuity's value to another annuity is treated as a tax-free exchange if nothing is withdrawn from or surrendered under either contract during the 180 days beginning on the transfer date. Annuity payments for life or for a period of 10 years or more don't count against the rule. If money comes out early, the IRS treats the transfer according to its substance under general tax principles.

Best-interest checks before a 1035 exchange

A 1035 exchange answers the tax question. It doesn't answer whether the exchange is right for your client. Every exchange is a replacement, and replacements get extra scrutiny from carriers and regulators.

Under the NAIC's best-interest model regulation (#275), when you recommend an exchange or replacement you consider the whole transaction, including whether your client will:

• Pay a surrender charge or start a new surrender period.
• Lose existing benefits, such as death, living or other contractual benefits.
• Pay higher fees, investment advisory fees or rider charges.

You also weigh whether the new contract would substantially benefit your client compared with the old one over its life, and whether your client has had another exchange or replacement, particularly within the preceding 60 months. Our annuity best-interest rule checklist covers the full standard.

Before you recommend the move, pull these numbers from the existing contract:

• Surrender value: what actually transfers after any surrender charge and, on some contracts, a market value adjustment that can raise or lower the value.
• Income rider benefit base: a rider's benefit base isn't cash. It stays with the old contract and ends when that contract is surrendered.
• Death benefit: any enhanced death benefit your client would give up.
• Bonus vesting: premium bonuses on some contracts vest over time or can be recaptured.
• Remaining surrender schedule: how much longer the old contract charges for early withdrawals, compared with the new contract's full schedule.

Replacement forms for a 1035 exchange

States base their replacement rules on the NAIC Life Insurance and Annuities Replacement Model Regulation (#613), and each state adopts its own version. Under the model:

• When a replacement is involved, you present and read the Notice Regarding Replacement no later than when you take the application. You and your client both sign it, and your client keeps a copy.
• The notice lists each policy or contract being replaced.
• You leave your client a copy of the sales material you used and submit the required documents to the replacing carrier.
• The replacing carrier notifies the existing carrier within five business days.
• Your client gets a 30-day free look on the replacement contract.

Carrier forms and state versions differ, so use the replacing carrier's current forms for the state where you're writing the business.

Qualified money: transfers and rollovers, not 1035 exchanges

Section 1035 is for non-qualified contracts. IRA and retirement-plan annuities move under the retirement-plan rules:

• Trustee-to-trustee transfer: the cleanest route between IRAs. The IRS says a direct transfer isn't a rollover, so it doesn't count toward the one-rollover limit.
• 60-day rollover: your client takes the distribution and has 60 days to roll it over. Only one IRA-to-IRA rollover is allowed in any 12-month period, counting all of your client's IRAs together.
• Plan distributions paid to your client: they carry mandatory 20% withholding, even if your client plans to roll the money over. A direct rollover avoids it.

The best-interest and replacement rules still apply when qualified money moves from one annuity to another. For required minimum distributions on annuities held in IRAs, see RMDs and annuities in 2026.

1035 exchange checklist for producers

1. Confirm the money is non-qualified. If it's in an IRA or plan, use a transfer or direct rollover instead.
2. Confirm the exchange type qualifies under Section 1035.
3. Pull the old contract's surrender value, surrender schedule, any market value adjustment, rider benefit base, death benefit and bonus vesting.
4. Compare the new contract and document why it substantially benefits your client over its life.
5. Check for any exchange or replacement in the last 60 months.
6. Complete the replacement notice and your best-interest documentation.
7. Keep the owner the same on both contracts.
8. Use the receiving carrier's 1035 exchange form, with no surrender check paid to your client.
9. On a partial exchange, tell your client not to take money out of either contract for 180 days.
10. Track the transfer until the funds arrive and the new contract issues, and confirm the cost basis carried over.

Exchanges stall when paperwork is incomplete or the surrendering carrier needs its own forms, so someone has to follow up until the money moves. BetterAnnuityComp.com's case management includes pre-submission review, best-interest paperwork review and 1035 exchange and transfer tracking through issue. For product-level detail, see our pages on MYGA commission and fixed indexed annuity commission. This article is general information for licensed professionals, not tax or legal advice.

Frequently asked questions

Can BetterAnnuityComp.com beat my current annuity commission?

That is our sole job: no matter your current commission level, if you meet our minimum requirements (solo producers have none), you automatically get higher commission than where you are today. Starting comp is for every producer, including new producers with no experience, and there is no production minimum. If you have strong production to show, we contract you above our starting comp, and established agencies, financial advisors and financial firms, and healthcare agencies can earn above it too. Submit your application, schedule a Zoom and share your current commission levels by carrier. We compare them carrier by carrier and contract you above them, with full back office support, case management, carrier contracting and sales tools included.

Is a 1035 exchange taxable?

Not if it qualifies. No gain or loss is recognized on a qualifying exchange under Section 1035, and the new contract keeps the old contract's cost basis, so the gain is deferred rather than erased. A surrender check paid to the owner and then used to buy a new annuity is not a 1035 exchange (Rev. Rul. 2007-24).

Can you do a 1035 exchange from an annuity to life insurance?

No. Section 1035 allows a life insurance policy to be exchanged for an annuity, but an annuity can't be exchanged for a life insurance policy. An annuity can be exchanged for another annuity or for a qualified long-term care insurance contract.

What is the 180-day rule for a partial 1035 exchange?

Under Rev. Proc. 2011-38, a direct transfer of part of an annuity's value to another annuity is treated as a tax-free exchange if nothing is withdrawn from or surrendered under either contract during the 180 days beginning on the transfer date. Annuity payments for life or for 10 years or more don't count against the rule.

Can an IRA annuity be moved with a 1035 exchange?

No. IRA and retirement-plan annuities move by trustee-to-trustee transfer or rollover under the retirement-plan rules. A direct transfer isn't a rollover, so it doesn't count toward the one-rollover-per-12-months limit on IRA-to-IRA rollovers.

Does a 1035 exchange need replacement forms?

Yes. A 1035 exchange replaces an existing contract, so your state's replacement rules apply. Under the NAIC model, you present and read the Notice Regarding Replacement no later than the application, you and your client sign it, and the replacing carrier notifies the existing carrier within five business days.

Does a 1035 exchange restart the surrender period?

Usually. The old contract may charge a surrender fee on the way out, and a new deferred annuity typically starts its own surrender schedule. That's why the best-interest review weighs surrender charges, a new surrender period and lost benefits before you recommend an exchange.

Sources

• 26 U.S. Code § 1035 — Certain exchanges of insurance policies (Cornell LII)
• 26 CFR § 1.1035-1 — Certain exchanges of insurance policies (GovInfo)
• IRS — Rev. Proc. 2011-38, partial exchanges of annuity contracts (Internal Revenue Bulletin 2011-30)
• IRS — Rev. Rul. 2007-24 (Internal Revenue Bulletin 2007-21)
• IRS — Notice 2011-68, annuity and life contracts with a long-term care feature
• IRS — Rollovers of retirement plan and IRA distributions
• NAIC — Suitability in Annuity Transactions Model Regulation (#275)
• NAIC — Life Insurance and Annuities Replacement Model Regulation (#613)

Writing exchange business? BetterAnnuityComp.com works to beat your current annuity commission — starting comp has no experience requirement and no production minimum, and strong producers are contracted higher — with case management that includes 1035 exchange and transfer tracking through issue. Solo producers can apply here, agencies can start with the agency application, and you can check the annuity carrier list first. See how we beat your current commission.