Final answer:
A 1035 exchange allows for a tax-free transfer of funds from one life insurance policy to another, provided the new policy has the same insured person and follows specific rules.
Step-by-step explanation:
Switching life insurance policies without tax consequence is permitted under a provision known as a 1035 exchange. A 1035 exchange is a section of the Internal Revenue Code that allows policyholders to transfer funds from a life insurance policy to a new policy of the same or another company without any immediate tax liabilities.
It is often used by policyholders seeking better coverage, lower premiums, or improved policy performance. For a successful exchange, it must be a direct transfer from one insurance company to another; indirect rollovers can have significant tax consequences.