86. A whole life policy is replaced with an annuity without incurring a tax penalty. This is referred to as
Answer: D
A 1035 Exchange.
A whole life policy can be replaced with an annuity without incurring a tax penalty through a 1035 Exchange, which allows for the transfer of cash value from one insurance product to another without triggering tax consequences.
A) a Cross-Purchase Plan.
A Cross-Purchase Plan refers to a type of buy-sell agreement where co-owners of a business purchase life insurance on each other to fund the buyout of a deceased partner's share. This does not pertain to the exchange of policies or avoiding tax penalties, making it incorrect in this context.
B) an Endowment Contract.
An Endowment Contract is a life insurance policy that pays out a lump sum after a specified term or upon death. While it is a type of insurance product, it does not facilitate the tax-free exchange of a whole life policy for an annuity, thus it is not the correct answer.
C) a Transfer of Value.
A Transfer of Value occurs when the ownership of a life insurance policy is transferred and can lead to tax implications. This term does not specifically refer to the tax-free exchange of life insurance for an annuity, making it an incorrect choice.
D) a 1035 Exchange.
A 1035 Exchange is a provision in the U.S. tax code that allows for the tax-free exchange of one life insurance policy for another or for an annuity. This option perfectly describes the situation where a whole life policy is replaced with an annuity without incurring tax penalties.
Conclusion
The 1035 Exchange is the definitive answer as it specifically allows for the tax-free transfer of value between insurance products, fulfilling the conditions of the question. All other options do not accurately describe this process or are unrelated to the tax implications of such an exchange.