Advisors' Advice: When Should Clients Exchange Variable Annuities?

(Think Advisor) Yes, you and your clients can exchange one variable annuity contract for another. But should you?

The Financial Industry Regulatory Authority recently warned investors about making such a move, urging them to be aware that replacing one VA with another involves “a comparison of the complex features of each security.”

FINRA, as well as advisors polled by ThinkAdvisor, stress that there are good reasons to consider an exchange — as well as situations when an exchange is generally not a good idea.

The Internal Revenue Service allows clients to exchange one VA contract for a new one without paying tax on the income and investment gains earned on the original contract through a 1035 exchange, FINRA notes, which “can be a substantial benefit — and is often used as a selling point.” However, this tax benefit comes with “some important strings attached,” as FINRA notes in a recent investor alert.

Nonetheless there are opportunities for this to happen, one such being:

Mike Giefer, private wealth manager, Creative Planning, St. Paul Minnesota

We just worked with a client through the process of a 1035 exchange for a new annuity contract. The primary driver for this decision was switching to a much lower cost annuity. Most variable annuities purchased a few decades ago have very high internal expense ratios. In this particular instance we were able to reduce the annual cost of the annuity by close to 2 percent of the annuity's value. This allowed our client to keep more of their money each year, which over the next 30 years we calculated could add $150,000 in value just through cost savings alone.



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