A Section 1035 exchange lets a policyowner swap one insurance contract for another without paying tax on the gain at the time of the swap. The gain is carried over into the new contract.
The memory trick: you can move toward less life insurance protection, not toward more. Life insurance sits at the top, then endowment, then annuity.
Allowed (no gain recognized):
Life insurance to life insurance, to an endowment, or to an annuity
Endowment to endowment (with payments starting no later than under the old contract) or to an annuity
Life, endowment or annuity to a qualified long-term care insurance contract
Not allowed under §1035:
Annuity to life insurance
Endowment to life insurance
The law sets no time limit on when you may do an exchange, but the exchange must be a direct swap of contracts. If you cash out and then buy a new policy, the gain is taxable.
Remember that a 1035 exchange is still a replacement under California law: the replacement notice, comparison and 30-day free look rules still apply.