Question 92

A whole life policy is replaced with an annuity without incurring a tax penalty, referred to as a 1035 Exchange.

A 1035 Exchange allows for the tax-free transfer of funds from one insurance policy to another, specifically from a life insurance policy to an annuity. This provision enables policyholders to switch their investments without facing immediate tax consequences.

A) a Cross-Purchase Plan.

A Cross-Purchase Plan is a business arrangement where co-owners of a business buy insurance policies on each other's lives to fund the purchase of a deceased owner's share. This option does not relate to the tax-free exchange of insurance policies or annuities.

B) an Endowment Contract.

An Endowment Contract is a type of life insurance policy that pays out a lump sum after a specific term or upon the insured's death. This option does not pertain to the exchange of a whole life policy for an annuity without tax penalties.

C) a Transfer of Value.

A Transfer of Value refers to situations where the ownership of a life insurance policy is transferred, potentially triggering a taxable event. This term does not describe the specific provision that allows for tax-free exchanges of whole life policies for annuities.

D) a 1035 Exchange.

A 1035 Exchange is the correct term for the tax-free transfer of a whole life policy to an annuity. It allows policyholders to avoid tax penalties while reallocating their investments, making it a beneficial option for managing financial assets.

Conclusion

The 1035 Exchange is the only option that accurately describes the tax-free exchange of a whole life policy for an annuity. All other options either refer to unrelated concepts or involve potential tax liabilities, thereby confirming that D is the definitive correct answer.