Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
Guides › Life Insurance Decisions
Updated July 31, 2026. Quick answer: IRC §1035 is a one-way door. Tax-free exchanges run life → life, life → annuity, life → long-term-care insurance, annuity → annuity, annuity → LTC — but never annuity → life. For a policy you no longer want as insurance, exchanging into an annuity moves the entire gain, untaxed, into a vehicle built for income — and it is one of the few moves that works for BOTH winners and losers.
The winner’s case and the loser’s case
Gain policy: a $150,000 cash value with $60,000 basis surrenders into $90,000 of immediate ordinary income — or 1035s into an annuity with zero tax now, deferring the gain until withdrawals (or forever, for the portion annuitized as basis-inclusive payments). Loss policy: basis $100,000, cash value $80,000 — a surrender wastes the loss entirely (no deduction). The 1035 carries the FULL $100,000 basis into the annuity, so the next $20,000 of annuity growth comes back to you tax-free. Old universal-life policies surrendered mid-life are loss policies surprisingly often — check before you surrender one.
A 1035 is plumbing. The destination is the decision.
Which annuity – or whether an annuity at all – is a portfolio question. The matching service below introduces you to advisers who pay to meet you. Ask them to model the exchange against simply surrendering in a low-bracket year.
Before you start, what actually happens. The form is run by Kapitalwise, our advisor-matching partner. Kapitalwise sends your details to advisers who pay for the introduction, so expect calls and texts. Clear Money Guide is paid when you submit the form, whether or not you ever hire anyone. This is free to you and there is no obligation to hire anyone.
The Kapitalwise form opens here — you stay on this page.
What happens when you press the button
It asks about nine questions — age, investable assets, location — then your name, email and phone number, and verifies the phone by text. Nothing loads and nothing reaches Kapitalwise until you press the button.
The execution rules that actually bite
The money must move carrier to carrier — take a check yourself and the exchange fails into a taxable surrender. Same-owner, same-insured is required. An outstanding policy loan complicates everything: many carriers will not accept an encumbered exchange, and dropping the loan in the process can be taxed as boot — resolve the loan design first (the loan trap). On the annuity side, the surrender-charge clock usually restarts: yes, and here is how; the annuity’s own exit rules are covered in annuity surrender taxation. And a growing hybrid option: 1035 into a long-term-care design, which converts an unwanted death benefit into care coverage tax-free.
Two doors most people are never shown: reduced paid-up keeps a smaller policy with no further premiums, and since 2010 a policy can be exchanged tax-free for long-term care coverage — though that one only opens in one direction.
More Life Insurance Decisions guides: see the full 81-page index.