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Guiding your customers through an annuity exchange

Life changes may drive decisions about exchanging one annuity for another. That may seem simple because in many cases, it is permissible. However, your customers should only make this decision after careful analysis.

Section 1035 of the Internal Revenue Code allows customers to exchange a current insurance contract for a new life insurance or annuity contract without paying tax on the income and investment gains earned on the original contract. While the option might appear as a substantial benefit, depending on circumstances, the exchange may result in significant disadvantages. Suitability steps are critical; you are required to examine your customer’s current annuity, financial situation and overall needs.

Before recommending an exchange, consider these important points and questions.

Who can consider an annuity contract exchange? Back To Top

A 1035 exchange might be appropriate if your customers:

  • Have an annuity with an uncompetitive interest rate

  • Want an annuity with lower fees

  • Seek more guarantees or different features (e.g., higher minimum guaranteed rate, waivers for terminal illness or extended care)

 

Annuity exchange recommendations: factors to consider Back To Top

Avoid surprises. Carefully examine the new contract to uncover potential issues. Discuss the annuity features in detail to help avoid challenges. It is critical to communicate withdrawal penalties and associated costs for the new benefits. Before making a recommendation, ask yourself:

  • Did I review the current contract and examine its features and benefits?

  • Did I compare the proposed contract to determine if one annuity is better suited?

  • Would the customer incur penalties for exchanging the annuity?

  • Would the customer face tax consequences or penalties for exchanging?

  • Does the new contract meet the customer’s liquidity needs? Will the customer have access to his or her money?

  • Are the features and benefits of the new annuity too costly?

  • Is the new withdrawal charge period reasonable and would it match the customer’s investment time horizon?

  • Did I fully explain the features, benefits and applicable costs or withdrawal charge periods to the customer?
 

When can you make an exchange recommendation? Back To Top
An annuity contract exchange is only appropriate if it is in your customer’s best interest. It is your obligation to only make a recommendation after you have conducted a thorough review of both the old and the proposed new contract. You are also expected to complete an assessment of the customer’s financial objectives, income and liquidity needs to determine whether an exchange transaction is appropriate.