5 things to consider before switching annuities
Older doesn’t always mean better when it comes to annuities, but that doesn’t mean that you should be so quick to jump ship. It’s important to know what to consider before transferring your old annuity to a new one.
A lot of deferred annuities have been sold over the past few decades, and many of them are beyond their surrender charges. Not having to pay a surrender fee, however, should not be viewed as a sell signal.
It’s important to weigh all of your options before signing any paperwork, so let’s look at some of the key factors involved when deciding if transferring your annuity makes sense:
1. Try to maximize your options within your current policy
Before any transfer paperwork is signed, you need to find out exactly what you own, and all the benefits included within your old policy. My advice is to call the carrier directly and talk to someone within the company for a full explanation of what you own. It’s the internal customer service person’s job to do that, and they will spend as much time as needed until you fully understand all the benefits within your policy, and how to maximize the contract.
If you are thinking about transferring a deferred annuity to a single premium immediate annuity for income now needs, you should check the annuitization quote with your current carrier and compare it to the best national immediate annuity quotes with other companies. With those comparison numbers, you then can choose the highest contractual guaranteed payout.
The same strategy applies when looking at income rider payouts for future income. Always compare your current carrier contractual payouts to “the street” to make sure you are getting the highest guaranteed number. A lot of times, your older contract is a better choice, so don’t change for change sake.
2. The new policy has to be contractually better for you
Never buy an annuity for hypothetical, theoretical, or projected returns. Always base your decision solely on the contractual guarantees (i.e. worst case scenario) of an annuity policy. It’s very easy to make proposal numbers look fantastic, so always have the agent or the carrier run the non-guaranteed part of the annuity calculation at zero, or the guaranteed minimum stated within the contract.
Another item to look at is the safety of your current carrier compared with the annuity carriers you are considering. Annuity guarantees are as good as the company backing them up, so do your homework here. I recommend using Comdex scores, because it is a compilation of four ratings services (S&P, Fitch, Moody’s, A.M. Best) with a scoring system of 1 to 100, with 100 being the best score.
3. Don’t transfer because of an upfront bonus
My famous saying concerning annuity upfront bonuses is, “Buying an annuity for the bonus is like buying a car for the stereo.” It makes absolutely no sense, and should never be the primary reason to transfer.
A high percentage upfront bonus or income rider is not a reason to move to a new annuity. It always comes down to the overall policy guarantees.
Most bonuses are vested over a long time period, and a high bonus doesn’t always guarantee that the new annuity is better from a contractual standpoint than what you currently own. Always remember, if it sounds too good to be true, it always is. There are no exceptions to this rule3 — especially with annuities
4. Consider the surrender charges
When looking at surrender charges, you need to consider those surrender penalties within your current policy as well as with the new policy. Just because your old policy is past its’ surrender period doesn’t mean that you have to move it.
Most deferred annuities with attached benefit riders that are purchased today have typical surrender charges spread out over a seven to 10 year time frame. If you are considering a transfer to a single premium immediate annuity or longevity annuity (aka: deferred income annuity), you need to be aware of the liquidity limitations within those structures before moving forward.
5. The transfer math has to work in your favor
Always compare the contractually guaranteed benefits within your old annuity to the contractually guaranteed benefits within the new proposed policy. Remember that you should own an annuity for what it will do (i.e. contractual guarantees), not what it might do (i.e. projected returns). As the saying goes, don’t buy the sizzle, buy the steak.
Annuities outside of an IRA structure can be transferred as a nontaxable event by using the IRS approved 1035 transfer rule. Annuities within an IRA can transfer directly to another IRA with an annuity carrier, and not create any tax consequences as well. In addition, the receiving carrier will review your annuity to annuity transfer application to make sure that it is suitable and appropriate, and in some cases deny the transfer if they feel it is not in your best interests.
Immediate annuity type structures cannot be transferred, so only deferred annuities like variable, fixed, or indexed can be moved. Annuities were designed to be transfer of risk solutions, so ask yourself what you want the money to do, and then find the best contractual guarantee to solve for that specific issue. That might mean transferring your old annuity to a newer one if it makes mathematical sense, but you might realize that it’s better to keep the policy you already have after running comparison numbers.
Always do your homework, take your time, and make sure you fully understand the pros and cons before signing that annuity transfer paperwork.
Originally published by MarketWatch.com 8.13.2013 – http://www.marketwatch.com/story/5-things-to-consider-before-switching-annuities-2013-08-13