What does "not 1035" refer to in insurance terms?

The term "not 1035" in insurance refers specifically to transactions that do not comply with Section 1035 of the Internal Revenue Code, which allows for tax-free exchanges of certain types of insurance products. The correct answer regarding what "not 1035" signifies focuses on the specific relationship between variable life insurance policies and whole life policies.

When you see "not 1035," it typically indicates that a conversion from variable life insurance to whole life does not qualify for tax-free treatment under Section 1035. This is crucial for policyholders to understand because it implies that the exchange may result in tax liabilities unlike transactions that meet the criteria set out in the code. In this context, the relationship between variable policies—often associated with investment components—and the more stable whole life policies contrasts with the specifics of how tax laws apply, leading to important financial decisions for policyholders.

Understanding the distinctions in how various types of life insurance can be exchanged and the implications of those exchanges is vital for individuals considering shifts in their insurance strategies, especially concerning the tax consequences.