Question 42

A 1035 Exchange does not qualify for an annuity to a whole life policy.

A 1035 Exchange allows for the tax-free transfer of certain life insurance and annuity contracts. However, converting an annuity to a whole life policy is not permissible under this exchange.

A) a whole life policy to an annuity.

This option is correct under a 1035 Exchange as it allows the tax-free transfer of cash value from a whole life policy to an annuity. This type of exchange is designed to provide policyholders with more flexible options for their investments and retirement planning.

B) a whole life policy to another whole life policy.

This option is also valid under a 1035 Exchange. Policyholders can exchange one whole life policy for another without incurring tax consequences, allowing them to adjust their insurance coverage as needed.

C) an annuity to a whole life policy.

This option is incorrect as it does not qualify for a 1035 Exchange. The exchange rules specifically restrict the conversion of annuities into whole life policies, making this option non-compliant with the 1035 provisions.

D) an annuity to another annuity.

This option is permissible under a 1035 Exchange. Transferring the value of one annuity to another annuity is allowed, facilitating changes in investment strategies while maintaining tax deferral on gains.

Conclusion

The correct answer is C because an annuity cannot be exchanged for a whole life policy under the 1035 Exchange rules. Options A, B, and D are valid exchanges that comply with the regulations, demonstrating the specific limitations placed on the types of policies that can be exchanged tax-free.