Which transaction allows a life policy to be replaced with another life policy while postponing tax consequences?

The correct transaction that allows a life policy to be replaced with another life policy while postponing tax consequences is a Section 1035 exchange. This provision under the Internal Revenue Code permits the direct transfer of cash surrender values from one life insurance policy to another without triggering any tax liabilities at the time of the exchange.

By utilizing a Section 1035 exchange, policyholders can switch to a new life insurance policy that may better meet their needs—whether through lower premiums, improved benefits, or enhanced coverage—while deferring taxes that would otherwise be incurred on the gain from the original policy. This aspect of tax deferment is crucial, as it encourages policyholders to make beneficial adjustments without immediate financial penalties.

In contrast, the other options do not serve the same purpose or provide the tax deferral advantage. A life settlement involves selling a policy for cash, generally resulting in immediate tax consequences. Policy rollover typically pertains more to retirement accounts rather than life insurance, and a tax-deferred exchange is a broader term that can apply across different asset classes, but specific tax benefits for life insurance exchanges are notably established under Section 1035.