Your consideration of the consequences of exchanging an annuity should take into account the following questions:
1. What is the total cost to me of this exchange? Although income taxes continue to be deferred, there are some other costs to consider before making the switch. For example, will the annual fees or other charges assessed by the new life insurance company offset the higher interest or bonus payments? Does the surrender charge justify the added benefits? What are the comparative costs associated with the guaranteed benefits and investment options?
2. How do the surrender provisions compare? One of the biggest transactional costs that often comes into play for any annuity exchange is the surrender charge. For many companies, surrender charges eventually expire with an existing contract after a certain period of time. However, a new contract could increase these charges and could even increase the period of time in which the surrender charges apply.
3. What are the new features being offered and why do I need or want those features? For example, you might realize the life insurance guarantee or long-term care benefit rider is not really needed if other resources already exist. Of course, just the opposite could hold true if you need the coverage and cannot find a life or long-term care insurer to take you because of health reasons. You should also consider whether there are any limitations that apply to the features? For example, if there is a guaranteed interest rate, how long does it last? Although the current interest rate for one company might be better, it's also important to consider past payment history. Also, what are the relevant expenses? Do they justify the benefits?
Keep in mind that a 1035 exchange does not provide a permanent income tax exclusion for gains on such exchanges, but merely a deferral - since the basis of the contract given up is carried over as the basis of the new contract received.
Call us at Annuity Liberty for more information!
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