Keeping the taxman at bay may seem next to impossible these days, however with annuities the IRS/Congress blessed us with one strategy to maintain the tax-deferred status when we move from one annuity to another – the 1035 exchange.
Watch as the Annuity Guys® examine the proper use of a 1035 exchange.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Before we proceed any further, we do want to make sure everyone realizes that we are not advocating for exchanges of annuities. Annuities are long term products designed for retirement and replacement of annuities can mean a loss in benefits and potential to incur surrender changes and fees. Consequently, we would recommend working with an annuity specialist who can provide you with specific benefits and shortfalls needed to be considered prior to exchanging an annuity.
The most common time a 1035 exchange is employed is at the end of the contract term which typically runs concurrently with the surrender period. If the insurance company has reduced the benefits or **guarantees on the annuity, consumers will oftentimes solicit new quotes to see if anything better exists. If they are so fortunate as to find a new annuity with better benefits, the account owner can transfer to the new company without incurring any tax consequence by utilizing a 1035 exchange.
A 1035 exchange is typically completed by filling out the appropriate transfer paperwork with the new carrier.
Lastly, not every transfer qualifies for tax shelter under the 1035 Exchange. You, for the most part must transfer the same insurance product type for the same insurance product type. This means you can swap an annuity for an annuity or life insurance cash value for an annuity but you cannot trade an annuity for a life insurance policy since life insurance is tax free and not just tax deferred like annuities.
Should You Exchange Your Variable Annuity?
If you have a life insurance or annuity contract, you may have been approached to exchange it for a new model, one with better or the latest features. You need to know that even though tax law makes the exchange income tax free and the new contract may sound better for you, you may be losing—not gaining—if you make the exchange.
We are issuing this Alert because we have found investor confusion about variable annuity# exchanges, and we have brought cases where investors were investing in variable annuities# that were not suitable for them.
This Alert will give you information on how to determine if an exchange is right for you, and how you can find out what you need to know to make a smarter decision.
Some Background
You may know that an annuity is a contract between you and an insurance company where the company promises to make periodic payments to you, starting immediately or at some future time. You buy the annuity either with a single payment or a series of payments.
You should also know that annuity contracts come in three flavors: fixed, variable and equity-indexed. Fixed means that the earnings and payout are **guaranteed by the insurance company. Variable means that the amount that will accumulate and be paid will vary with the stock, bond, and money market funds that you chose as investment options. Unlike fixed contracts, variable annuities# are securities registered with the Securities and Exchange Commission (SEC). Sales of variable insurance products are regulated by the SEC and FINRA. Equity-indexed annuities (EIAs) have characteristics of both fixed and variable annuities#. Their return varies more than a fixed annuity, but not as much as a variable annuity#. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity#. [Read More from FINRA]