utlilizing basis of underfunded UL

client has underfunded Universal life policy that is about to expire, they paid 50,000 of premium over life of contract with no withdrawals. If they 1035 the 1,000 of remaining cash value into an annuity to save the basis and the add 200,000 of non qualified dollars from CD (201,000 annuity value with 250,000 basis). If they have the insurance company distribute the interest each year will it be tax free until 49,000 of interest has been distributed?