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Read This Before You Exchange Your Variable Annuity

There are many reasons why you might consider exchanging your variable annuity product. You might be looking for a better deal, your needs might have changed, or perhaps your insurance company is initiating a variable annuity exchange. Whatever the reason, there are a lot of details to look into before you make the final decision to exchange your annuity. MetLife Securities Inc. was recently fined $20 million by FINRA because of the way they represented their variable annuity products. The company also has to pay $5 million to thousands of customers whom FINRA says were not given the proper information about variable annuity transfers. This information comes from “Should You Exchange Your Variable Annuity?,” an article written by the FINRA staff for Nasdaq.

If you are thinking about making a variable annuity transfer, you have to compare each feature of both annuities, along with all associated costs and guarantees. FINRA said that MetLife left information out of their comparisons and misrepresented other facts, making the transfer seem like a better deal to consumers than it actually was. Most of the customers ended up with variable annuities that were more expensive than the ones they already had. This fine is bringing ethics back to the forefront of the insurance industry, something that is also being done with the DOL’s new fiduciary rule. Consumers can certainly benefit from more truthful information sharing and annuity contracts that must have the consumers’ best interest at the forefront.

Variable annuities are contracts between you and the insurance company holding the product. How much money you accumulate and the amount of your payments are both based on the funds you have chosen for your investment options. There are a lot of fees associated with variable annuity products, something that you have to compare for each annuity when you are thinking about exchanging one variable annuity for another. Surrender charges come if you withdraw your money before the surrender period is up. Mortality and expense charges are for the insurance risk that the company takes on with any annuity. There are also administrative fees, underlying fund expenses and charges for any special features like GMIBs or stepped-up death benefits.

The IRS allows you to make a 1035 exchange from one annuity product to another without paying income taxes or taxes on the gains in the original annuity. Keep in mind that there are some stipulations associated with this exchange. If you are thinking about exchanging your variable annuity, the following are typically good reasons to do so. The first reason would be if the investment funds with the new VA better meet your goals than those with your current VA. Look at the prospectuses to determine the fund strategy, investment risk, diversification and anything else associated with the investment funds. The second reason to exchange your variable annuity is for the cost. Do a detailed comparison between the annuities to see if the costs are lower with your new variable annuity product. The last reason would be if the new variable annuity product had better benefits than your old one, for example living benefits or enhanced death benefits. You’ll have to take all three of these reasons into consideration before finalizing a 1035 variable annuity exchange.

Just like there are reasons why an exchange may make sense, there are also three reasons that you shouldn’t make an annuity exchange. If your insurance company offers you a bonus or premium payments to try and get you to make an exchange, it’s probably a better deal for them. Expenses are usually higher with these bonuses, in effect canceling out any bonus you would receive. If there is any chance that you might need to access the annuity money in the short term, making an exchange for an annuity is not worthwhile. You will have to enter into a new surrender period with a new variable annuity, something with added consequences if the surrender period is up with your current annuity product. Finally, don’t exchange your variable annuity if you have to pay higher annual fees or higher charges overall. Take a good look at all of the costs, benefits and guarantees associated with both variable annuity products before making a 1035 exchange.

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