Another great question from our readers who already have a bit of a background and some experience with annuities is the question, “Should I exchange my annuity for a newer one?”
Before you just up and exchange annuity, make sure you have a good reason to exchange your annuity. What this means is, make sure you’ve studied every single document surrounding both annuities.
Make sure you understand the ins and outs, and make sure you know all of the fees that could arise, not just at the beginning but also at any point in the maturing of the annuity. Don’t just trust the insurance agent to give you a full explanation or to even be fully honest, especially if they work on a commission.
1035 Exchange Annuity
Here is where you must be very careful about any annuity exchange. If you exchange annuities, you will be filling out a 1035 exchange annuity form, named after the IRS code that regulates these exchanges.
The insurance agent may make this sound like the most glorious thing in the world, explaining how you won’t end up incurring any tax penalties and you can just exchange annuity right over to the newer and better benefits. This may be true, but what you aren’t being told is that there will be a commission on the sale that will come out of your investments.
This is why they will hype you up on the sale. There is always an agenda, that is important to never forget! Somebody is profiting in every step, and hopefully you can be included, but not if you lose out by paying for every one else’s cut!
The 1035 Exchange Annuity Surrender Period Swap
When you do a 1035 exchange annuity form and swap over to a new annuity, you also swap for a brand spanking new surrender period. This won’t be a big deal for those who still have enough time left until retirement. But for those who are very close to retirement, it won’t be smart because your surrender period starts over completely.
So say your annuity is 12 years old. You have made it past the initial surrender charge period where you would have incurred a penalty if you took an annuity cash out. Remember, this is the penalty that slowly decreases year after year until it is gone. If you exchange annuity, you will be starting over fresh on this surrender period. So make sure you don’t plan on collecting payments yet if you do exchange annuity.
So please, let me reiterate… research the documents given to you by the insurance agent. Don’t just listen to what he has to say, because he is thinking about that commission payment coming right out of your nest egg.