Final answer:
The correct option is B) a 1035 exchange.
A cash value life insurance policy conversion into an annuity without immediate tax consequences is known as a 1035 exchange.
Step-by-step explanation:
The conversion of a cash value life insurance policy into an annuity through a nontaxable transaction is commonly referred to as a 1035 exchange. This financial maneuver is named after Section 1035 of the Internal Revenue Code, which provides a specific provision allowing policyholders to seamlessly transfer funds from a life insurance policy to an annuity without triggering an immediate tax liability.
A 1035 exchange serves as a strategic financial tool for individuals seeking to optimize their financial planning, particularly in the context of retirement income. By leveraging this provision, policyholders can transition their accumulated cash value from a life insurance policy to an annuity, facilitating the creation of a stream of income during their retirement years.
One of the key advantages of a 1035 exchange is the preservation of the tax-deferred status of the transferred funds. Unlike a taxable event, such as surrendering the life insurance policy for cash, a 1035 exchange enables policyholders to reallocate their assets without incurring immediate tax consequences. This feature enhances the flexibility and efficiency of managing financial resources for retirement planning.
In essence, the 1035 exchange mechanism under Section 1035 of the Internal Revenue Code provides a tax-advantaged avenue for policyholders to transition from life insurance to annuities, aligning with their evolving financial goals, particularly those related to retirement income strategies.