53 / Can tax on the gain at maturity of an endowment contract be postponed?

Yes.

With an election to have proceeds paid under an installment or life income option, the gain can be spread over a fixed period of years or over the payee’s lifetime ( Q 52). Tax on the gain also may be postponed by electing the interest-only option before maturity and retaining no withdrawal rights ( Q 21).

Another method to postpone the gain appears to be a situation in which the endowment is exchanged before maturity for a deferred annuity ( Q 44, Q 570). The IRS has ruled that the exchange of an endowment for an annuity is a tax-free exchange.¹

Some contracts provide that the owner may elect to continue the contract in force to an optional maturity date. If the contract so provides, and the election is made before the original maturity date, the owner should not be in constructive receipt of the gain under the policy before the optional maturity date. There are no specific rulings on this, however.

See also Q 65 with respect to contracts subject to the definitional rules of IRC Section 7702.