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Read This Before Making a 1035 Annuity Exchange


There are many reasons for people to want to exchange their annuity product for another. Big changes in your life or financial situation might warrant an annuity exchange. In the Marketwatch article, “Five tips for when you want to exchange your annuity,” Andrew Murdoch of Somerset Wealth Strategies and Annuity FYI tells you what to consider before making this big financial decision. A 1035 annuity exchange allows you a tax-free exchange from one annuity product into another. Many people who are have passed the surrender period of their annuity product think that they might be able to transfer to a “better” annuity without paying any penalties or taxes.

Some people are lured by higher interest rates or better benefits. When interest rates are high, insurance companies earn more on their bonds, so they increase the annuity benefits they offer consumers. When rates are low, like they are now, the benefits offered are less. It’s a possibility that you will find an annuity product with a higher interest rate, higher indexed annuity caps, better benefits, or better investment options within a variable annuity. Murdoch doesn’t believe that is very likely though. He says to first make sure you know exactly what you have with your current annuity product. Many people overlook some of the benefits they already have, especially when their money has already been in the annuity for years. There is a good chance that they are already “in the money” with their current annuity. That means that their benefit base is larger than the actual cash value of the annuity. If your benefit base has grown from $100,000 to $200,000 over time, your withdrawals will be based on that $200,000 benefit base. If you transfer your annuity product to a new one, you effectively lose $100,000 because you start back at the $100,000 cash value you are using to purchase the annuity. That is a big factor to consider.

The following points are the five things Murdoch says you should consider before making a 1035 annuity exchange. Are you out of your surrender period? If not, it’s rarely wise to pay surrender charges in order to get into a new annuity. Look at your current policy in detail, preferably with a reputable advisor, to ensure that you know exactly what you have. Consider your death benefit, living benefit and cash value. Determine how far behind you would be with a new annuity if your current annuity is already “in the money”. If your death benefit is one of the reasons you purchased an annuity, know how yours works in detail. Enhanced death benefits offer growth rates or guaranteed step-ups and might lose you value if you leave your current annuity. You might not lose out if your death benefit is a standard one. Compare the changes in the cash value of your annuity with any changes in your living benefits. Murdoch says that when living benefits aren’t growing but you have seen a worthwhile increase in your cash value, an annuity exchange could increase your income. Finally, determine whether your financial preferences are bullish or bearish before deciding upon a fixed, indexed or variable annuity product. Annuities with the potential for growth are often a good match for those with bullish tendencies. Bearish investors seek annuity products with guaranteed* benefits.

Before exchanging your annuity for another product, it’s important to know the details of what you already have and compare that with exactly what you could get in a new annuity. The grass isn’t always greener on the other side, but speaking with a financial advisor can help you determine if a 1035 annuity exchange is right for you.

Written by Rachel Summit

Follow Rachel, aka Finance Mama, on Twitter and Google+

*Guarantees of annuities rely on the financial strength and claims-paying ability of the insurance company that issues them. Lifetime payouts may be a benefit of the base annuity contract, or may be offered through the additional purchase of a lifetime benefit rider.

1. Murdoch, Andrew. “Five tips for when you want to exchange your annuity.” Marketwatch, August 13, 2015. https://www.marketwatch.com/story/five-tips-for-when-you-want-to-exchange-your-annuity-2015-08-13

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