Final answer:
A 1035 exchange is a tax-free transfer of a life insurance policy, endowment policy, or annuity for another policy of the same kind without incurring immediate taxation, according to Section 1035 of the Internal Revenue Code. The valid 1035 exchange must be for another life insurance or annuity contract.
Step-by-step explanation:
A 1035 exchange is a provision in the United States tax code that allows for the tax-free transfer of an existing life insurance policy, endowment policy, or annuity to another policy without incurring immediate taxation. The correct answer to the question "A valid 1035 exchange of a Life Insurance contract must be" is C. For another life insurance or annuity contract.
This type of exchange is named after Section 1035 of the Internal Revenue Code, which states that certain exchanges of insurance policies are not taxable events. The primary conditions for a 1035 exchange to be valid include that the exchange must be directly from one policy to another without receiving the cash value, and the policyholder remains the same. It's also essential that the new policy must be of the same kind—meaning you can exchange a life insurance policy for another life insurance policy or for an annuity contract but not for other types of non-qualified instruments.
Cash-value life insurance, also known as whole life insurance, combines a death benefit with a cash value component. This accumulated cash value can act as an investment or savings account for the policy owner, and can be accessed through policy loans or withdrawals, subject to the policy terms.