Which exchange is permitted on a tax-free basis in accordance with Section 1035 of the Tax Code?

The correct choice pertains to a deferred market-value adjusted annuity being exchanged for an immediate variable annuity, which is allowed under Section 1035 of the Tax Code for several reasons.

Section 1035 facilitates the tax-free exchange of certain life insurance and annuity contracts to encourage consumer mobility and allow policyholders to adapt their financial products to better meet their needs without incurring a tax liability. In this case, the exchange involves two types of annuities, both of which fall under the same category as defined by the Tax Code.

When a policyholder exchanges a deferred market-value adjusted annuity for an immediate variable annuity, there is no immediate recognition of gain or income. This is particularly beneficial as it allows individuals to access new features, benefits, or investment strategies offered by the immediate variable annuity while retaining the tax-advantaged status of their funds.

In contrast, exchanges involving a cash value life insurance policy for a term life insurance policy, an immediate annuity for a deferred annuity, or a regular investment account for a retirement annuity do not meet the specific criteria outlined in Section 1035. For instance, converting a cash value life policy to a term life policy does not qualify because it is not an exchange