Series 7 practice questionmediumPackaged Products — Variable Annuities
A 1035 exchange allows an annuity owner to:
- AConvert an annuity to a life insurance policy tax-free
- BTransfer an annuity to a different owner without gift tax consequences
- CWithdraw all earnings tax-free if the annuity has been held for more than 10 years
- DExchange one annuity contract for another without triggering a taxable event✓ Correct answer
Explanation
Why D — Exchange one annuity contract for another without triggering a taxable event
A 1035 exchange, named after IRC Section 1035, allows a tax-free exchange of one annuity contract for another, or a life insurance policy for an annuity. The cost basis carries over to the new contract. However, you cannot exchange an annuity for a life insurance policy tax-free. Surrender charges on the old contract may still apply.
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