A 1035 Exchange is the exchange of one insurance policy for a newer policy with no tax consequences. It offers an investor the opportunity to exchange an old, outdated insurance contract for a newer contract that offers beneficial features the investor now wishes to include. For example, a policy owner might choose a contract with lower costs, a higher death benefit, the drawing of monthly installments or different investment options.
Section 1035 allows owners of annuities (and life insurance) the opportunity to exchange an older annuity contract for a newer contract that may offer features more in line with current needs. As an example, the older contract may be crediting a lower interest rate than a new annuity may offer.
If you have an older annuity it is still possible you may also have an annuity with a surrender penalty in place. How do you move your money to a higher rate of interest and not lose any of your account to these surrender fees?