What is a key benefit of executing a 1035 exchange?

Executing a 1035 exchange provides significant tax advantages, as it allows a contract owner to transfer the value of an existing life insurance or annuity contract to a new one without incurring immediate tax liability on any gains. This means that when funds are exchanged under this provision, the original contract’s accumulated gains are not taxed at the time of the exchange. Instead, the tax is deferred until the new contract is eventually cashed in or annuitized. This feature is particularly beneficial for individuals looking to maintain the tax-advantaged growth of their investments while transitioning to products that may better meet their financial goals or needs.

While preserving the cost basis, waiving surrender charges, or recognizing gains could be considerations in different contexts, they do not offer the same integral advantage of a 1035 exchange regarding the immediate tax implications, which is the primary reason option C is the best answer.