A 1035 exchange is an IRS rule that lets you move money from one annuity or life insurance policy directly into another without triggering income tax on the gains. Named for Section 1035 of the tax code, it keeps your tax deferral intact when you switch products.
In plain terms: A tax-free way to trade an old annuity or life policy for a better one.
Think of it as transferring your seniority when you change jobs instead of starting over. The gains you have built up carry across to the new contract untaxed, as long as the money moves insurer-to-insurer and never lands in your hands. As of 2026, a 1035 exchange can swap an old low-rate annuity for a current one, but watch for a fresh surrender period and any surrender charge on the old contract.
A 1035 exchange can rescue money stuck in a dated, high-fee, or low-rate contract without a tax bill. But a new contract can restart the surrender clock, so the upgrade has to be worth the fresh lock-up.
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