Question

A 58-year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If this investor wished to exchange this policy for one offered by a competing company:________.
A) the investor would be liable for ordinary income taxes on $350,000.
B) the tax-free exchange privilege applies only when the exchange is within the same insurance company.
C) the investor would be liable for ordinary income taxes plus the 10% penalty on $350,000.
D) using a 1035 exchange would avoid any current taxation.

Answer 1

Answer:

D) using a 1035 exchange would avoid any current taxation.

Explanation:

A 1035 exchange gives permission for someone who owns a life insurance or annuity to exchange products even though this transaction would not be regarded as a sale.

This kind of sale exchange can be done from an insurance policy to an annuity. But it cannot be done the other way, that is from an annuity to an insurance policy.