If Changing Annuities Take Care
Q: I have an annuity that is maturing this month. My broker is suggesting I exchange it for another policy with a different company. What do you suggest? Scott, Valley Center
A: Let's begin by discussing the maturity of your fixed annuity.
Understand that an annuity, first and foremost, is a life insurance policy. And, like all insurance policies, does not mature. Rather, it stays in effect until you either cancel the policy or die. This applies to all annuities: fixed, variable or indexed.
What most people mistake for maturity is the date the surrender charge period on the policy finally ends, usually five years or more. After the surrenders date, you can now withdraw money without any penalty for early withdrawal.
In addition, a feature unique to a fixed annuity can be confusing.
Often compared to certificates of deposit, these policies provide a fixed rate of return for a fixed period of time, usually three or five years. At that time the insurance company will offer you another interest rate that reflects current conditions.
Many advisers will try to convince you that, indeed, your policy has matured when either the surrender period or the interest rate lock on the policy occurs. Their motive is to get you to do an exchange, for a new annuity policy. That, of course, would trigger a new commission and surrender period.
Switching from one annuity policy to another is called a 1035 exchange. The Financial Industry Regulatory Authority -- formerly known as the National Association of Securities Dealers, or NASD -- several years ago issued an investor alert offering suggestions on such switches.
The good news is that a 1035 exchange avoids any tax consequences.
I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.
If you simply redeemed the policy you would be on the hook for any state and federal income taxes due on the accrued, tax-deferred interest.
But the regulatory authority says you need to ask a number of questions before proceeding. For instance, what will be the costs of making the exchange? Although you could be told otherwise, the broker will collect a fee that could range between 4 percent and 8 percent when you make the switch.
Also, there could be a fee charged by your current insurance company to close or transfer the policy. Ask who will pay that expense.
You also need to determine what benefits you will receive by making the exchange. Many annuity policies have features that may sound impressive but actually do you little good.
And don't sign anything until you read the application in detail.
Once you get the new policy, be sure to read it quickly and, if there is anything you don't like, you can give it back and have your money returned.