Yes, in many cases you can convert a life insurance policy into an annuity.

However, not every life insurance policy qualifies.

Generally, the policies that may be eligible are those with accumulated cash value, such as Whole Life or Indexed Universal Life policies. If exchanging the cash value aligns with your financial goals, you may be able to transfer it into an annuity without creating a taxable event by using a 1035 exchange.

Key Takeaways

• Some cash value life insurance policies can be exchanged for an annuity.
• A 1035 exchange generally allows the transfer without immediate tax consequences.
• The decision should be based on your financial goals—not simply because the option exists.
• Different annuity types solve different retirement objectives.
• Always evaluate what you're giving up before replacing a life insurance policy.

Which Life Insurance Policies Can Be Converted?

Not every life insurance policy has value that can be transferred.

Policies that commonly accumulate cash value include:

• Whole Life insurance
• Indexed Universal Life (IUL)
• Universal Life with cash value
• Certain other permanent life insurance policies

If your policy has available cash value, you may have the option of exchanging all or part of that value into an annuity.

Term life insurance generally does not build cash value and therefore typically cannot be converted in this manner.

What Is a 1035 Exchange?

A 1035 exchange refers to a section of the Internal Revenue Code that generally allows certain insurance products to be exchanged without triggering current income taxes.

For example, you may be able to exchange:

• one life insurance policy for another
• a life insurance policy for an annuity
• one annuity for another annuity

When completed properly, the transfer is generally not considered a taxable event at the time of the exchange.

The Bigger Question Isn't "Can You?"

Just because a 1035 exchange is available doesn't mean it's the right move.

The more important questions are:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

Your answers determine whether exchanging the policy serves your best interests.

Understand What You're Giving Up

Before exchanging a life insurance policy, carefully evaluate what the current contract provides.

A policy may include:

• a death benefit
• cash value accumulation
• policy loans
• living benefits
• other contractual features

Moving the cash value into an annuity may reduce or eliminate some of those benefits.

That's why every exchange should begin with a review of the existing policy—not simply a recommendation to replace it.

If Your Goal Is Lifetime Income

Some people no longer need the death benefit but want guaranteed retirement income.

In that situation, exchanging the policy's cash value into an Immediate Annuity or another lifetime income solution may make sense.

The objective becomes transforming accumulated cash value into guaranteed income that cannot be outlived.

If Your Goal Is Principal Protection

Others simply want to preserve the money while earning a guaranteed rate of interest.

A Multi-Year Guarantee Annuity (MYGA) may be appropriate if principal protection is the primary objective.

Rather than focusing on market performance, a MYGA offers contractual guarantees for a specified period.

Be Careful With "Tax-Free Income" Claims

One area that often creates confusion involves cash value life insurance.

Some sales presentations describe withdrawals from certain life insurance policies as "tax-free income."

It's important to understand exactly how the policy works.

In many situations, money accessed from the policy is obtained through policy loans, not income.

A loan isn't the same as income, even if it may have favorable tax treatment under certain circumstances.

Before making decisions based on tax-related claims, understand exactly how your policy functions and consult a qualified tax professional regarding your specific situation.

Annuities Solve Different Problems

If exchanging your policy is appropriate, the next step is identifying what you want the annuity to accomplish.

Annuities contractually solve four primary retirement objectives using the PILL framework:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

The correct annuity depends entirely on which of these goals you're trying to achieve.

Compare Carriers Before Making a Decision

Annuities are commodity products.

That means different insurance companies offer different contractual guarantees.

Rather than selecting the first option presented, compare multiple carriers to determine which one offers the strongest contractual guarantees for your specific situation.

The focus should always be on the contract—not the sales presentation.

Review the Existing Policy First

Sometimes the best recommendation is to leave the current life insurance policy exactly as it is.

Other times, a 1035 exchange into an annuity better aligns with your retirement objectives.

The only way to know is by reviewing:

• the current policy
• the available cash value
• the death benefit
• your retirement goals
• your income needs
• your overall financial plan

Every exchange should be evaluated individually.

Where to Compare Annuity Options

If you're considering exchanging a life insurance policy into an annuity, you can use our annuity calculators to compare contractual guarantees from multiple insurance companies before making a decision.

The Bottom Line

Yes, many life insurance policies with cash value can be converted into an annuity through a tax-free 1035 exchange.

The more important question isn't whether you can make the exchange—it's whether you should.

Start by identifying your financial goals, evaluate what you're giving up, compare contractual guarantees across multiple carriers, and choose the solution that best fits your retirement plan.

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