Is upgrading your variable annuity a good idea?
I found this in the The Daily Independant:
I’m a big fan of annuities, both fixed and variable. They combine many of the attributes that retirement conscious investor’s desire: safety of principle, asset growth, income guarantees and tax deferral.
Many of the newer variable annuities (VA) are equipped with some pretty nifty additional features that can insure against market losses, safeguard income from market fluctuations and provide estate-planning benefits.
Over the past few years many annuity holders have switched from their old annuity to one of the newer types. Perhaps it’s a good idea to consider upgrading your annuity. It’s also probably a good idea to look seriously at moving your long-term investment and retirement dollars into an annuity, because of their safety features, which mutual funds, stocks and bonds don’t have.
A word of caution, if you’re considering swapping your existing variable annuity for a new one, make sure you’re doing it for the right reasons.
Make sure you have sound reasons for exchanging an existing fixed or variable annuity for a new one. As I mentioned above, new annuities offer improved features the older ones don’t. A newer annuity may offer more investment options or may lower fees than your current annuity. You may want to move into an annuity with a higher rated company.
Unlike many other investments such as stocks, bonds and mutual funds, you can exchange one annuity for another by using a 1035 tax-free exchange, without causing tax liability. But should you make the exchange? Financial experts seem to be split on this issue.
The first thing to consider is will you pay any penalties or surrender charges to exchange your annuity. If the answer is yes, find out what they are. If the cost is small, the exchange is more easily justified. However, some charges could be thousands of dollars, making the exchange prohibitive.
Second, many investors have exchanged because of poor performance. On the surface this appears to be a valid reason. However, during periods of market decline, most funds will fall in value, regardless of which annuity they’re in. Therefore, moving into another annuity to “chase returns” is probably a bad idea. You may consider researching other investment options within your existing annuity.
Another factor to consider is whether it’s worth the exchange just to get the features and safe guards. Do you really need them? Do they make sense for your needs? Will they help you achieve your financial goals?
Another issue to consider is the death benefit on your existing annuity. You may lose a chunk of your death benefits if the value of your annuity is less than the guaranteed death benefit.
A 1035 exchange into a new annuity may be a great way to improve your financial situation. But every situation is unique and you need to consider all the issues to determine whether it is economically worth your while. You might be better off to keep your existing annuity and buying a new VA with new money if it has the benefits you want.
If you own an annuity and wonder if there’s something better out there, your best bet is to consult with a financial advisor to determine if switching will be in your best interest.