Washington Life Producer Practice Exam

When Tonya replaced her whole life policy with an annuity without incurring a tax penalty, what is this transaction referred to as?

1. 1031 Exchange

2. 1035 Exchange

3. IRA Rollover

4. Tax-Free Exchange

The correct answer is: 1035 Exchange

When Tonya replaced her whole life policy with an annuity without incurring a tax penalty, this transaction is referred to as a 1035 Exchange. This term specifically applies to the tax code provision that allows for the exchange of one insurance policy for another insurance policy, or the exchange of an insurance policy for an annuity contract, without triggering a taxable event. The primary benefit of a 1035 Exchange is that it allows policyholders to transition from one financial product to another while deferring taxes on any gains that may have been present in the original policy. This mechanism is especially useful for individuals who want to take advantage of better policy benefits or to meet changing financial needs without facing immediate tax liabilities. The 1031 Exchange, on the other hand, pertains to real estate transactions and allows for the deferral of capital gains tax on investment properties. An IRA Rollover refers to moving retirement funds from one individual retirement account to another without tax penalties, which is a specific strategy for retirement accounts and not directly applicable here. The term Tax-Free Exchange is too broad and can refer to various types of exchanges, but it does not specifically denote the type of exchange regulated under Section 1035 of the tax code. Thus, the 103