When you use money from an existing annuity to buy another one, the process is often referred to as an annuity exchange. While this action is not extremely complicated or rare, just like any aspect of financial planning, there is important information you should be aware of before doing it. Here’s a look at some of the key factors to consider when debating an annuity exchange, according to the financial experts at Forbes.
If the funds that you use to purchase the annuity are qualified, as with an IRA, the annuity exchange is governed by the rules governing the IRA (or other plan) within which the annuity is held. When the funds come from a non-qualified source then it’s considered a 1035 exchange. A life insurance policy can also be exchanged for an annuity under the rules of a 1035 exchange, but you can not exchange an annuity contract for a life insurance policy.
If you are currently unhappy with your annuity contract or are looking for something new, understanding the 1035 exchange policy is a great place to start. A 1035 exchange can help you achieve a different goal or receive a better rate, all while maintaining tax-deferred status. While not all annuity contracts are able to be exchanged, majority allow for full or partial exchanges. Exceptions include irrevocable annuities without cash values, like longevity and immediate annuities. Annuities with some liquidity and/or a surrender schedule, like fixed, indexed and variable annuities, can be exchanged.
Before jumping into a 1035 exchange, it’s crucial to consider why you purchased your original annuity and why it no longer meets your needs. In addition, consider these other factors.
- Confirm your current rate and under what circumstances it could change down the road. This ensures that you are getting a better deal when exchanging for a new annuity.
- Understand your surrender schedule. Most fixed and fixed indexed annuities have one, and if you exchange an annuity while it’s still in the surrender period, you’ll have to pay a penalty. There can be scenarios where it makes sense to exchange even if this period isn’t over, but in most cases you’ll be better off waiting.
- Learn how much time you have to do the exchange penalty-free. Typically, fixed annuities have at least a 30 day window at the end of the surrender period when you can execute a 1035 exchange penalty-free before there is a renewal to a new rate. Other products, such as variable annuities, don’t have a renewal per se, so there’s more flexibility around when you can exchange. The 1035 exchange process can take up to 3 weeks, so it’s a good idea to be aware of your window and options so that you’re ready to act in order to ensure it is completed in time.
- Know the details of your policy. You will be required to provide the new insurer with important details of your existing annuity in order to determine if an exchange is in your best interest. Here’s a list of the information required for most exchanges:
- The insurer name
- Product type (fixed, variable, indexed, etc)
- Contract/policy number
- Type of funds used to purchase the product (qualified or non-qualified)
- Initial premium
- Cash value
- Surrender charge (if any)
- Death benefit
- Reason for exchange
It may seem like a lot of information, but most of it can be found under the Contract Summary in your policy documents.
- If you are unhappy with your current insurance agent, you are not required to work with them when doing a 1035 exchange. Consulting other agents or online annuity marketplaces prior to doing a 1035 exchange is a great way to ensure that you are seeing the entire available market and to make sure you’re getting the best deal possible.
- Regardless of the type of annuity you currently have, you can exchange it for any other type, so be sure to understand your primary objective. It’s best to start by defining your goal first and then finding a product that will help you achieve it. If you are looking for guaranteed income, consider an immediate or longevity annuity. If you want guaranteed growth, think about exchanging to a fixed annuity. If you’re most interested in taking advantage of potential market upside, you should consider a fixed indexed or variable annuity.
If you are unhappy with your current annuity contract, you do have options to change it. As with any financial planning, it is always recommended that you speak to a trusted financial advisor before making any final decisions. If you have any questions or concerns, please visit our website at www.annuityfyi.com and contact us for further assistance.
Written by Rachel Summit