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Guiding your customers through an annuity exchange

Changes in your customer’s life may require decisions about whether or not to exchange one annuity for another. That may seem simple since in many cases, it is permissible. However, your customers should only make this important decision based on careful analysis. Most likely, they will rely on your knowledge and guidance.

Take time to become familiar with Section 1035 of the Internal Revenue Code. It allows customers to exchange a current insurance contract for a new life insurance or annuity contract without paying tax on the income and any investment gains earned on the original contract. Note that while the option might appear as a substantial benefit, depending on a customer’s circumstance, the exchange may result in significant disadvantages. Again, the suitability steps are critical. You are required to examine your customer’s current annuity, financial situation and overall needs. Before you recommend that your customers exchange one annuity for another, consider the important points and questions below.

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 to take advantage of an annuity that offers lower fees

  • Seek more guarantees or better, more current features such as a higher minimum guaranteed rate or waivers for terminal illness or extended care

 

Annuity exchange recommendations: factors to consider Back To Top

Set aside time to carefully examine all aspects of the new contract to uncover issues that can impact your customer. Discuss the annuity features in detail to help avoid potential challenges. It is critical to communicate new withdrawal penalties and/or associated costs for the new benefits. The goal is to avoid surprises. In considering your customer, ask yourself these questions before you make an exchange recommendation:

  • Did I review the customer’s current annuity contract and examine the features and benefits it offers?

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

  • Would the customer incur early withdrawal or other penalties for exchanging the annuity?

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

  • Does the new annuity 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 new 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 the exchange 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 ensure you make an accurate determination of whether an exchange transaction is appropriate.