Life Insurance Annuity Contracts
Act 40 provides the taxability of an exchange of life insurance annuity contracts will follow the requirements of Section 1035 of the Internal Revenue Code. Therefore, do not report the gain (loss) on the sale, exchange, or disposition of any insurance contracts that include:
An exchange of a life insurance contract for another life insurance contract, an endowment contract, or an annuity contract;
An exchange of an annuity contract for another annuity contract;
An exchange of an endowment contract for an annuity contract; or
An exchange of one endowment contract for another endowment contract if the dates for payments begin on or before the original contract’s payment dates.
If the exchange of contracts has the effect of transferring property to a non-U.S. person, the gain or loss is not tax exempt. If cash or other boot is involved with the exchange of the contracts, the gain or loss is also not tax-exempt.
Under these rules, if there is no cash involved, the exchange will be tax-free. If the exchange involves cash, the amount of cash received will be taxable as interest income.